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The Divergent Effects of Long-Term and Short-Term Entry Investments on Home Market Cartels

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Listed author(s):
  • Daniel Cracau

    ()

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

  • Abdolkarim Sadrieh

    ()

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

Abstract

Positive effects of multimarket activities on cooperation between firms are widely acknowledged. We study these effects in a setting with home market asymmetries as is typical for global competition. In our multimarket duopoly experiment each firm has a home market but may also enter the other firm's market. Without entry barriers, we observe a high level of mutual forbearance with firms serving their home markets exclusively. With short-term entry barriers, the competition rates decrease significantly, as expected. Surprisingly, with long-term entry barriers, firms exhibit higher levels of competition, entering each other's market more often. We conjecture that in the latter case, bearing the cost of entry is perceived as a signal for the intention to compete and has an adverse effect on cooperation.

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Paper provided by Otto-von-Guericke University Magdeburg, Faculty of Economics and Management in its series FEMM Working Papers with number 140003.

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Length: 22 pages
Date of creation: Apr 2014
Handle: RePEc:mag:wpaper:140003
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Keywords: Market Entry Barriers; Mutual Forbearance; Prisoner's Dilemma; Experimental Economics;

Find related papers by JEL classification:

  • D4 - Microeconomics - - Market Structure, Pricing, and Design
  • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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