Monopoly rents in contestable markets

Luis Braido () and Felipe Shalders

Economics Letters, 2015, vol. 130, issue C, 89-92

Abstract: Random choices of prices and product characteristics can be used by a contestable monopolist to deter entry and fully extract the monopoly rent. We develop this idea in a model of Bertrand price competition. In equilibrium, one firm enters the market and makes choices that are unpredictable to its competitors. This prevents price undercuts and keeps other firms out of the market. The entrant firm collects the monopoly rent despite the existence of potential competitors. This result raises an alert for regulatory practices based on the conventional wisdom that contestability is associated with low prices and profits.

Keywords: Contestable markets; Monopoly; Profit; Price competition; Mixed strategy; Entry barrier (search for similar items in EconPapers)
JEL-codes: D4 L1 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:130:y:2015:i:c:p:89-92

DOI: 10.1016/j.econlet.2015.03.008

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