Productive Efficiency and Contestable Markets

Jean-Pierre Ponssard

Working Papers from HAL

Abstract: This paper provides a new game theoretic model consistent with the premises of contestable markets. Two firms repeatedly compete for a natural monopoly position. The limit price of the incumbent is disciplined by a hit and run strategy of the entrant. In this model, contrarily to thewell known Maskin and Tirole model (1988): i) productive efficiency is encouraged, the more efficient firm gets a higher rent as an incumbent than the one the less efficient firm would, ii) rent dissipation does not necessarily prevails, even in the case of equally efficient firms. This opens the way to a reassessment of the merits of contestable markets.

Keywords: Contestable markets; Markov strategies; Productive efficiency; Limit pricing (search for similar items in EconPapers)
Date: 2007
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