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Excess Liquidity against Predation

Author

Listed:
  • 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
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    More about this item

    Keywords

    Predation; excess liquidity; revelation principle; sequential equilibrium; strategic uncertainty;
    All these keywords.

    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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