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Coexistence of small and dominant firms in Bertrand competition: Judo economics in the lab

Author

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  • Abdolkarim Sadrieh

    () (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

  • Daniel Cracau

    () (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

Abstract

The theory of "Judo Economics" describes an optimal entry strategy for small firms. Using a capacity limitation, small firms force dominant market incumbents to accommodate. In this article, we study the power of Judo economics as an entry strategy in different market environments. We find experimental evidence supporting the theory in the original setting with a monopolistic, dominant market incumbent. When we introduce a cost advantage for small firms, profits go down. This can be explained by incumbents responding aggressive towards large entrants. For settings with multiple market incumbents, results are reversed. There, a cost advantage strengthens small firms and pricing below the incumbents' marginal cost provides the unique entry strategy.

Suggested Citation

  • Abdolkarim Sadrieh & Daniel Cracau, 2013. "Coexistence of small and dominant firms in Bertrand competition: Judo economics in the lab," FEMM Working Papers 130001, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
  • Handle: RePEc:mag:wpaper:130001
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    File URL: http://www.fww.ovgu.de/fww_media/femm/femm_2013/2013_01.pdf
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    References listed on IDEAS

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    1. Duffy, John & Hopkins, Ed, 2005. "Learning, information, and sorting in market entry games: theory and evidence," Games and Economic Behavior, Elsevier, vol. 51(1), pages 31-62, April.
    2. García Díaz, Antón & Hernán González, Roberto & Kujal, Praveen, 2009. "List pricing and discounting in a Bertrand-Edgeworth duopoly," International Journal of Industrial Organization, Elsevier, vol. 27(6), pages 719-727, November.
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    Cited by:

    1. Daniel Cracau & Benjamin Franz, 2013. "Judo Economics in Markets with Multiple Firms," FEMM Working Papers 130013, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    2. Cracau, Daniel, 2013. "Judo economics in markets with asymmetric firms," Economics Letters, Elsevier, vol. 119(1), pages 35-37.

    More about this item

    Keywords

    Judo economics; Market entry; Price competition; Capacity limitation; Experimental economics;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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