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Precautionary Bidding in a Dynamic Model of Discrete Noncooperative Entry Deterrence

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  • Gopal Das Varma

Abstract

We consider competitive bidding for a business license, via an open ascending-price auction, between two symmetric incumbents and a potential entrant, each of whom is privately informed about her own valuation of the license. Entry stands to reduce the payoff of each incumbent below that in status quo. The resulting symmetric game of discrete non-co-operative entry deterrence has an asymmetric equilibrium in which one incumbent always participates as a precaution, just in case the other incumbent does not participate. The other incumbent free-rides by participating only if her valuation is sufficiently high. In addition, the game has a symmetric equilibrium (SE). Relative to the SE, the asymmetric (competitive) equilibrium realizes bid data that is more consistent with typical patterns of collusive bids

Suggested Citation

  • Gopal Das Varma, 2004. "Precautionary Bidding in a Dynamic Model of Discrete Noncooperative Entry Deterrence," Econometric Society 2004 North American Summer Meetings 232, Econometric Society.
  • Handle: RePEc:ecm:nasm04:232
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    Keywords

    noncooperative entry deterrence; public good; auction; asymmetric equilibrium; collusion;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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