It is well-known in the IO literature that incumbent firms maywant to deter entry by behaving as if they are efficient. In this paper we showthat incumbents may sometimes prefer to encourage entry by mimicking thebehaviour of a less efficient firm for the following reason.If the incumbent cannot deter potential efficient entrants, he may want toelicit entry by an inefficient firm who would not enter if he knows that theincumbent is efficient. The presence of the additional firm in the market preventsfurther entry. The incumbent then faces a less efficient competitor in the longrun.
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