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A Dynamic Model of Bertrand Competition with Entry

  • Elmar Wolfstetter

    (HUB)

  • Walter Elberfeld

    (University Koeln)

This paper analyzes a simple, repeated game of simultaneous entry and pricing. We report a surprising property of the symmetric equilibrium solution: If the number of potential competitors is increased above two, the market breaks down with higher probability, and the competitive outcome becomes less likely. More potential competition lowers welfare - another Bertrand paradox. The model can also be applied to auctions to explore whether a revenue maximizing auctioneer should restrict the number of bidders if bidder participation is costly.

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Paper provided by EconWPA in its series Microeconomics with number 9701003.

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Date of creation: 24 Jan 1997
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Handle: RePEc:wpa:wuwpmi:9701003
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  1. Roger Sherman & Thomas D. Willett, 1967. "Potential Entrants Discourage Entry," Journal of Political Economy, University of Chicago Press, vol. 75, pages 400.
  2. McAfee, R. Preston & McMillan, John, 1987. "Auctions with a stochastic number of bidders," Journal of Economic Theory, Elsevier, vol. 43(1), pages 1-19, October.
  3. Elmar WOLFSTETTER, 1994. "Auctions: An Introduction," SFB 373 Discussion Papers 1994,13, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  4. Edward L. Millner & Michael D. Pratt & Robert J. Reilly, 1990. "Contestability in Real-Time Experimental Flow Markets," RAND Journal of Economics, The RAND Corporation, vol. 21(4), pages 584-599, Winter.
  5. Posner, Richard A, 1975. "The Social Costs of Monopoly and Regulation," Journal of Political Economy, University of Chicago Press, vol. 83(4), pages 807-27, August.
  6. Joseph Farrell, 1987. "Cheap Talk, Coordination, and Entry," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 34-39, Spring.
  7. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  8. Sharkey, William W. & Sibley, David S., 1993. "A Bertrand model of pricing and entry," Economics Letters, Elsevier, vol. 41(2), pages 199-206.
  9. Dasgupta, P. & Stiglitz, J. E., 1988. "Potential competition, actual competition, and economic welfare," European Economic Review, Elsevier, vol. 32(2-3), pages 569-577, March.
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