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Free Riding in Noncooperative Entry Deterrence with Differentiated Products

Author

Listed:
  • Dan Kovenock

    () (Purdue University)

  • Suddhasatwa Roy

    () (Department of Economics, California State University)

Abstract

We examine free riding and underinvestment in noncooperative entry deterrence in the Gilbert and Vives (1986) model with differentiated products. Our analysis proves that for products that are differentiated enough, when both entry allowing and entry deterring equilibria coexist, the symmetric entry deterring equilibrium may Pareto dominate the entry equilibrium. Hence, “coordination failure” underinvestment in entry prevention can occur. However, as claimed, the overinvestment result of Gilbert and Vives remains robust to moderate amounts of product differentiation. We also show that coordination failure underinvestment arises in a wide variety of entry deterrence models and does not rely on assumptions regarding strategic substitutability or complementarity of precommitments.

Suggested Citation

  • Dan Kovenock & Suddhasatwa Roy, 2005. "Free Riding in Noncooperative Entry Deterrence with Differentiated Products," Southern Economic Journal, Southern Economic Association, vol. 72(1), pages 119-137, July.
  • Handle: RePEc:sej:ancoec:v:72:1:y:2005:p:119-137
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    Cited by:

    1. Persson, Lars, 2004. "Predation and mergers: Is merger law counterproductive?," European Economic Review, Elsevier, vol. 48(2), pages 239-258, April.
    2. repec:ebl:ecbull:v:4:y:2008:i:14:p:1-5 is not listed on IDEAS
    3. Felix Höffler, 2008. "On the consistent use of linear demand systems if not all varieties are available," Economics Bulletin, AccessEcon, vol. 4(14), pages 1-5.
    4. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899.
    5. Gopal Das Varma & Giuseppe Lopomo, 2010. "NON-COOPERATIVE ENTRY DETERRENCE IN LICENSE AUCTIONS: DYNAMIC VERSUS SEALED BID -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 58(2), pages 450-476, June.
    6. Mariotto, Carlotta & Verdier, Marianne, 2015. "Innovation and competition in Internet and mobile banking: an industrial organization perspective," Research Discussion Papers 23/2015, Bank of Finland.
    7. Appelbaum, Elie & Weber, Shlomo, 1992. "A note on the free rider problem in oligopoly," Economics Letters, Elsevier, vol. 40(4), pages 473-480, December.
    8. Carlotta MARIOTTO & Marianne VERDIER, 2015. "Innovation and Competition in Internet and Mobile Banking: an Industrial Organization Perspective," Communications & Strategies, IDATE, Com&Strat dept., vol. 1(99), pages 129-146, 3rd quart.
    9. repec:bof:bofrdp:urn:nbn:fi:bof-201511261452 is not listed on IDEAS
    10. Felix Höffler, 2008. "On the consistent use of linear demand systems if not all varieties are available," WHU Working Paper Series - Economics Group 08-01, WHU - Otto Beisheim School of Management.

    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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