CHAIN STORE PARADOXON

Elmar Wolfstetter and Brigitte Adolph
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Brigitte Adolph: HUB

Microeconomics from University Library of Munich, Germany

Abstract: In their seminal solution of the chain store paradox Kreps and Wilson assumed that the incumbent monopolist is predisposed, with a small probability, to fight entry. Milgrom and Roberts suggested to view this predisposition to fight as a result of precommitment to an aggressive course of action. However, they did not examine whether such an ability to make commitments is actually chosen by a rational incumbent monopolist. The present paper fills this gap. We assume that the monopolist has access to an appropriate commitment mechanism, with a small probability. Due to the possibility of misunderstanding or communication error, commitments are not perfectly observable. Otherwise, the assumptions of Kreps and Wilson are maintained. These plausible modifications have drastic implications: Precommitment becomes useless, and reputation effects break down; Selten's chain store paradox comes back in full force.

JEL-codes: D43 (search for similar items in EconPapers)
Date: 1997-01-24
Note: ps-document
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