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Entry Deterrence under Agency Constraints

  • Neelam Jain

    (Department of Economics, Northern Illinois University, U.S.A.)

  • Thomas D. Jeitschko

    (Department of Economics, Michigan State University, U.S.A.)

  • Leonard J. Mirman

    (Department of Economics, University of Virginia, U.S.A.)

We study models of signaling and entry deterrence when the incumbent firm is subject to agency restraints and the principal does not have the relevant information to signal to the potential entrant. The informational implications of the dynamic agency relationship are fully identified. A characterization of optimal contracts is given for both the case of deterministic markets as well as stochastic markets. Moreover, the differences between whether incentive contracts are observable or hidden are presented. We find that one would expect that the study of agency and entry is relevant in many markets, as agency makes entry more lucrative and principals may have reasons to invite entry to alleviate agency costs. We also propose empirically testable hypotheses that are based on the insights of this paper. This study suggests that entry deterrence is more likely to occur in less volatile markets. Also, entry deterrence is found to be more effective when incentives can credibly be made public.

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Article provided by College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan in its journal International Journal of Business and Economics.

Volume (Year): 2 (2003)
Issue (Month): 3 (December)
Pages: 179-195

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Handle: RePEc:ijb:journl:v:2:y:2003:i:3:p:179-195
Contact details of provider: Postal: 100 Wenhwa Road, Seatwen, Taichung
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  1. Bernard Caillaud and Benjamin Hermalin., 1991. "The Use of an Agent in a Signalling Model," Economics Working Papers 91-183, University of California at Berkeley.
  2. Neelam Jain & Thomas Jeitschko & Leonard Mirman, 2005. "Entry deterrence under financial intermediation with private information and hidden contracts," Review of Economic Design, Springer, vol. 9(3), pages 203-225, 08.
  3. Katz, Michael L., 1991. "Game-Playing Agents: Unobservable Contracts as Precommitments," Department of Economics, Working Paper Series qt79b870w0, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  4. Leonard J. Mirman & Thomas D. Jeitschko, 2002. "Information and experimentation in short-term contracting," Economic Theory, Springer, vol. 19(2), pages 311-331.
  5. Paul Milgrom & John Roberts, 1998. "Limit Pricing and Entry Under Incomplete Information: An Equilibrium Analysis," Levine's Working Paper Archive 245, David K. Levine.
  6. Thomas D. Jeitschko & Leonard J. Mirman & Egas Salgueiro, 2004. "The simple analytics of information and experimentation in dynamic agency," Working Papers de Economia (Economics Working Papers) 12, Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro.
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