Strengthening a weak rival for a fight

Martin Byford and Joshua Gans

International Journal of Industrial Organization, 2019, vol. 63, issue C, 1-17

Abstract: We provide a new model wherein firms of different productivities survive in an industry despite the threat of entry by high productivity firms. We demonstrate that an efficient incumbent has a unilateral incentive to establish a relational contract, softening price competition to strengthen its inefficient rival in a war of attrition that emerges post-entry, and raising the price of the inefficient firm in the acquisition market. We show that this equilibrium gives rise to persistent performance differences, market compression, and stability in the identity of firms in the market. Moreover, the relational contracting equilibrium is facilitated by strong anti-trust laws.

Keywords: Persistent performance differences; Strategic barriers to entry; War of attrition; Spatial competition (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:63:y:2019:i:c:p:1-17

DOI: 10.1016/j.ijindorg.2018.10.005

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