Permission to Exist

Martin Byford and Joshua Gans

No 20512, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We provide a new model that generates persistent performance differences amongst seemingly similar enterprises. Our model provides a mechanism whereby efficient incumbent rivals can give permission for an inefficient firm to exist in the presence of efficient entrants. We demonstrate that, in a repeated game, an efficient incumbent has a unilateral incentive to establish a relational contract that softens price competition to either strengthen the inefficient firm in a war of attrition that emerges post-entry or reduce the value to the inefficient firm of selling its position to entrants. The paper provides conditions under which that equilibrium exists and derives a number of empirical predictions as implications of the model. It is demonstrated that performance differences are likely to be associated with stability in the identity of firms in the market.

JEL-codes: L11 L22 (search for similar items in EconPapers)
Date: 2014-09
New Economics Papers: this item is included in nep-bec, nep-com, nep-ind and nep-mic
Note: IO PR
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