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Potential competition in the presence of sunk entry costs: an experiment

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  • Utteeyo Dasgupta

Abstract

This paper studies the effect of sunk entry-costs on potential competition in a multi-market framework, where potential entrants have different home market profits. Although sunk-entry-costs are supposed to increase entry barriers, the experimental results suggest that firms view entry costs differently depending on their home market profits. It is found that subjects are reluctant to enter, and compete in another market if they are already earning monopoly rents. Subjects instead, collude tacitly and earn monopoly rents in home markets, thereby weakening the effect of potential competition. In contrast, subjects who earn small secure returns in their home markets aggressively enter the contestable market whenever there are scopes for earning net profits. The threat of entry and the effects of potential competition are strong in the latter situation, forcing the monopoly incumbents to lower prices to limit-pricing levels.

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  • Utteeyo Dasgupta, 2009. "Potential competition in the presence of sunk entry costs: an experiment," New Zealand Economic Papers, Taylor & Francis Journals, vol. 43(2), pages 203-225.
    • Handle: RePEc:taf:nzecpp:v:43:y:2009:i:2:p:203-225
    DOI: 10.1080/00779950903005531
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    Cited by:

    1. Dasgupta Utteeyo, 2011. "Are Entry Threats Always Credible?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-41, December.

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    More about this item

    Keywords

    potential competition; contestable markets; sunk cost; limit-pricing; hit-and-run entry; collusion; experiment;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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