Capacity Competition in Differentiated Oligopolies: Entry Deterrence with Alternative Objective Functions

Ristić Bojan (), Trifunović Dejan () and Herceg Tomislav ()
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Ristić Bojan: PhD, Assistant Professor, Faculty of Economics, University of Belgrade
Trifunović Dejan: PhD, Full Professor, Faculty of Economics, University of Belgrade
Herceg Tomislav: PhD, Assistant Professor, Faculty of Economics and Business, University of Zagreb; Address: Trg J. F. Kennedyja 6, 10000 Zagreb

South East European Journal of Economics and Business, 2021, vol. 16, issue 1, 84-92

Abstract: This paper aims to identify the possible implications of quantity competition in markets with differentiated products on entry deterrence. If capacity commitments characterise this industry, quantities can be expected as the choice variable of rational players, even in the presence of product differentiation. Different equilibria of a static game occur depending on the degree of asymmetry of players, incumbent and entrant, which will crucially affect the shape of their best response functions. Asymmetry can stem from players’ advantage in demand and costs, their different objective functions, or the first-mover advantage. We will analyse entry where incumbent maximises the weighted average of profit and revenue while entrant is maximising profit. The reduction of asymmetry may intensify competition in the industry and, consequently, reduce entry barriers. Our findings provide an insight that could be used for practical recommendations for conducting competition policy and other sector-specific regulations, where the introduction and higher intensity of competition are desirable.

Keywords: differentiated oligopoly; capacities; quantity competition; asymmetry of players; incumbent; entrant (search for similar items in EconPapers)
JEL-codes: D43 L13 L21 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:seejeb:v:16:y:2021:i:1:p:84-92:n:1

DOI: 10.2478/jeb-2021-0007

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