Economies of Scope, Entry Deterrence and Welfare

Cesaltina Pires and Margarida Catalão-Lopes

The B.E. Journal of Economic Analysis & Policy, 2013, vol. 13, issue 1, 419-452

Abstract: This paper develops a model where the incumbent may expand to a related market to signal economies of scope and deter entry in the former market. We show that the incumbent only expands when scope economies are large enough. Thus expansion is a signal of larger economies of scope and, for certain parameter values, leads to entry deterrence. Although our game is two-period, the expansion strategy creates a long-term advantage. We further investigate the implications of prohibiting an entry-deterrent expansion. A major finding is that, in our model, this prohibition always decreases consumer surplus. In terms of global welfare, the impact is ambiguous but negative for many parameter values.

Keywords: economies of scope; signalling; entry deterrence (search for similar items in EconPapers)
JEL-codes: L12 L13 L25 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (1)

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DOI: 10.1515/bejeap-2012-0078

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