Hit and Run or Sit and Wait? Contestability Revisited in a Price-Comparison Site-Mediated Market

Michelle Haynes and Steve Thompson

International Journal of the Economics of Business, 2014, vol. 21, issue 2, 165-190

Abstract: The price-comparison site, with its (near-)zero sunk costs of entry, would appear to approximate the "almost perfectly contestable market" envisaged by the contestability theorists where "hit-and-run" entry was conjectured to constrain sellers to zero-profit outcomes. We investigate hit and run using a unique unbalanced panel of 295 digital-camera markets mediated by NexTag.com. We find, however, in line with Farrell (1986a)'s prediction, a bifurcation of strategies with low reputation/smaller participants favouring a hit-and-run strategy involving lower entry prices and shorter forays into the market than their high reputation/larger rivals. Furthermore, the former entrants induce a much larger price response from low-reputation incumbents, reflecting the more intense rivalry for the price-sensitive consumers willing to eschew retailer reputations.

Date: 2014
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DOI: 10.1080/13571516.2014.912450

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