Excess Liquidity against Predation

Dai Zusai

No 1201, DETU Working Papers from 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.

Keywords: Predation; excess liquidity; revelation principle; sequential equilibrium; strategic uncertainty (search for similar items in EconPapers)
JEL-codes: D86 G30 L12 (search for similar items in EconPapers)
Date: 2012-06
New Economics Papers: this item is included in nep-com and nep-ind
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