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Excess Liquidity against Predation

Author

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  • Dai Zusai

    () (Department of Economics, Temple University)

Abstract

We consider precautionary liquidity holding as counter-strategy for the entrant to protect himself from predation. Threat of predation, even if avoided in equilibrium, affects the financial contract to raise precautionary liquidity and the equilibrium outcome in the product market competition. When the incumbent's strategy is unverifiable, the entrant with small start-up capital cannot raise large enough precautionary liquidity; consequently, he shrinks his business so as to avoid predation. Predation evolves in the model only as perturbation from equilibrium strategy. We provide the revelation principle for a sequential equilibrium to select a sensible outcome by imposing robustness to such perturbation.

Suggested Citation

  • Dai Zusai, 2012. "Excess Liquidity against Predation," DETU Working Papers 1201, Department of Economics, Temple University.
  • Handle: RePEc:tem:wpaper:1201
    as

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    File URL: http://www.cla.temple.edu/RePEc/documents/detu_2012_01.pdf
    File Function: First version, 2012
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    References listed on IDEAS

    as
    1. Helmut Bester & Roland Strausz, "undated". "Imperfect Commitment and the Revelation Principle," Papers 004, Departmental Working Papers.
    2. Gerardi, Dino & Myerson, Roger B., 2007. "Sequential equilibria in Bayesian games with communication," Games and Economic Behavior, Elsevier, vol. 60(1), pages 104-134, July.
    3. Argenton, C., 2010. "Predation Under Perfect Information," Discussion Paper 2010-26, Tilburg University, Center for Economic Research.
    4. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, January.
    5. Mendez-Naya L. & Garcia-Jurado, I. & Cesco, J. C., 1996. "Perfection of Nash equilibria in continous games," Mathematical Social Sciences, Elsevier, vol. 31(1), pages 53-53, February.
    6. Martin J. Osborne & Ariel Rubinstein, 1994. "A Course in Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262650401, January.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Predation; excess liquidity; revelation principle; sequential equilibrium; strategic uncertainty;

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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