Entry Deterrence in a Duopoly Market

James Dana and Spier Kathryn E. ()
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Spier Kathryn E.: Kellogg School of Management and School of Law, Northwestern University and NBER

The B.E. Journal of Economic Analysis & Policy, 2007, vol. 7, issue 1, 37

Abstract: In a homogeneous good, Cournot duopoly model, entry may occur even when the potential entrant has no cost advantage and no independent access to distribution. By sinking its costs of production before negotiating with the incumbents, the entrant creates an externality that induces the incumbents to bid more aggressively for the distribution rights to its output. Each incumbent is willing to pay up to the incremental profit earned from the additional output plus the incremental loss avoided by keeping the output away from its rival. This implies that the incumbents are willing to pay up to the market price for each unit of available output. A sequential game in which the incumbents produce first is analyzed, and the conditions under which entry is deterred by incumbents' preemptive capacity expansions are derived.

Keywords: Cournot duopoly; entry deterrence (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (3)

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DOI: 10.2202/1935-1682.1653

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