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Raising Rivals’ Fixed Costs

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  • Morten Hviid
  • Matthew Olczak

Abstract

This article demonstrates that raising fixed costs can serve as a credible mechanism for a well placed firm to exclude its rivals. We identify a number of credible avenues, such as increased regulation, vexatious litigation and increased prices for essential inputs, through which such a firm can raise fixed costs. We show that for a wide range of oligopoly models this may be a profitable strategy, even if the firm’s own fixed costs are affected as much (or even more) than its rivals and even if it is less efficient. The resulting reduction in the number of firms in the market is detrimental to consumer welfare and hence worthy of scrutiny by competition and regulatory authorities.

Suggested Citation

  • Morten Hviid & Matthew Olczak, 2016. "Raising Rivals’ Fixed Costs," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 23(1), pages 19-36, February.
  • Handle: RePEc:taf:ijecbs:v:23:y:2016:i:1:p:19-36
    DOI: 10.1080/13571516.2015.1055913
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    File URL: http://hdl.handle.net/10.1080/13571516.2015.1055913
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    1. William P. Rogerson, 1984. "A Note on the Incentive for a Monopolist to Increase Fixed Costs as a Barrier to Entry," The Quarterly Journal of Economics, Oxford University Press, vol. 99(2), pages 399-402.
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