Restricting entry without aggressive pricing

Martin Alfaro and David Lander

Research in Economics, 2021, vol. 75, issue 4, 305-319

Abstract: This paper studies a strategic-investment model under endogenous entry of followers. We extend the standard setting à la Etro by incorporating multiple heterogeneous leaders and demand-enhancing investments directly affecting competition. Our findings indicate that all leaders simultaneously restrict entry without harming each other. Moreover, while entry accommodation never arises, a wide range of strategies is consistent with aggressive behavior, including quality upgrades exclusively targeted to high-valuation consumers. By using the tools of aggregative games, we provide conditions over demand primitives to identify when a leader over-invests and whether it (i) raises or lowers its price, (ii) increases or decreases its revenue, and (iii) supplies greater or lower quantities. We illustrate the results by completely characterizing outcomes under the Logit and CES demands.

Keywords: Demand-enhancing investments; Leaders; Endogenous entry; Free entry; Aggregative games (search for similar items in EconPapers)
JEL-codes: D43 L11 L13 L22 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reecon:v:75:y:2021:i:4:p:305-319

DOI: 10.1016/j.rie.2021.08.001

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