Judo Economics: Capacity Limitation and Coupon Competition

Judith R. Gelman and Steven C. Salop

Bell Journal of Economics, 1983, vol. 14, issue 2, 315-325

Abstract: This article analyzes the effect of credible capacity limitation on the interaction between an incumbent and an entrant. The prospect of price competition deters entry by a less efficient firm with unlimited capacity. If, however, the entrant practices "judo economics" and limits its capacity sufficiently, it is in the incumbent's interest to accommodate entry. The entrant can increase its profits by selling rights (coupons) to its scarce discount output. If the entrant is less efficient, the incumbent will choose to serve coupon holders at the discount price. When this occurs, the entrant sells coupons but no output, and industry production is rationalized.

Date: 1983
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