Entry and espionage with noisy signals

We analyze the effect of industrial espionage on entry deterrence. We consider a monopoly incumbent who may expand capacity to deter entry, and a potential entrant who owns an Intelligence System. The Intelligence System (IS) generates a noisy signal based on the incumbentʼs actions. The potential entrant uses this signal to decide whether or not to enter the market. The incumbent may signal-jam to manipulate the likelihood of the noisy signals and hence affect the entrantʼs decisions. If the precision of the IS is commonly known, the incumbent benefits from his rivalʼs espionage. Actually, he benefits more the higher is the precision of the IS while the spying entrant is worse off with an IS of relatively high quality. When the IS quality is private information of the entrant, the incumbent is better off with an IS of high expected precision while the entrant benefits from one of high quality. In this case espionage makes the market more competitive.     

Price-Matching Guarantees and Entry Deterrence under Incomplete Information

This paper studies price-matching guarantees in a market where entrant does not have perfect information about incumbent’s cost. The low-cost incumbent can adopt price-matching guarantees as a signal to distinguish itself from the high-cost type and thus effectively deter entry. On the other hand, the high-cost incumbent can successfully fool the potential entrant under certain conditions. Compared with the equilibriums in situations where the option of offering a price guarantee is not available, the use of this instrument either makes it easier for the low-cost incumbent to signal its cost, or expands the range of parameters over which the high-cost incumbent is able to deter entry successfully.     

中国轿车市场差异化进入壁垒探析

对于在位企业而言,进入壁垒对于保持其竞争优势至关重要。产品差异化是在位企业构建进入壁垒的重要手段之一。本文通过一个两阶段动态博弈模型,分析了在位企业通过合理的产品差异化程度设置进入壁垒的问题,进而从产品差异化的角度解释了轿车市场的进入壁垒问题。轿车产品通常具有较大的差异。产品的差异性一方面使得在位企业拥有竞争优势,另一方面有使得进入者可能在产品空间中找到理想的位置进入。为了达到遏制进入的目的,在位企业应当合理地设置自己的产品线,使得自己的产品保持合理的差异程度。合理的差异化程度将使得进入者在进入之后面对相近的替代产品的竞争无法达到规模经济的产量。而且,通过对中国轿车市场销量排行榜的分析,找到了支持理论模型的经验证据。     

Tariff Policy and the Foreign Entry Decision in the Presence of a Cost-Based Informational Asymmetry

The paper demonstrates that the standard prediction on the relation between tariff rates and the mode of foreign entry—exports or direct investment—may not hold in the presence of incomplete information. A foreign firm lacks full information on the cost structure of an informed incumbent firm located in the domestic (potential) host country. Within a two‐period model, the local incumbent may behave in a manner which keeps the potential foreign entrant uninformed of its cost structure. In such a pooling equilibrium, the uninformed foreign firm either refrains from entering altogether or serves the host country via exports at tariff rates which would, otherwise under complete information, induce entry via direct investment. When entry mode is altered, other standard full‐information effects of trade policy may also no longer hold.     

Strategic Entry Deterrence by Limiting Qualities under Minimum Quality Standards

We consider a minimum quality standard (MQS) regulation under a vertically differentiated duopoly model where an incumbent may deter entry by limiting qualities, and explicity examine the strategic interaction between entry cost and a limit quality. We show that MQS will increase social welfare in most cases by reducing the incentive of the incumbent to limit quality, but it might render industry entry unprofitable for the entrant, which could induce predation to deter entry.     

How the source of the entrant's advantage limits entry‐deterring tying

I revisit a simple model of entry‐deterring tying—example 1 from Whinston's (1990) seminal paper—but allow the potential entrant to have either a cost advantage or a willingness‐to‐pay (WTP) advantage relative to the incumbent. I show that, compared to the usual case in which the potential entrant is cost‐advantaged, tying is less effective against an entrant with a WTP advantage because an entrant with a large WTP advantage may be able to induce the buyer to buy both the tied bundle and the entrant's product. I also show that tying but failing to deter entry can be less costly when facing an entrant with a WTP advantage than when facing an entrant with a cost advantage. For a firm facing uncertainty about, for example, the entrant's entry costs, this makes tying a more attractive entry deterrence strategy against a WTP‐advantaged entrant. These results shed light on the important policy question of which markets are most likely to be susceptible to entry‐deterring tying.     

The Impact of Cost Changes on Industry Entry and Exit

Increases in costs may have interesting, non-obvious effects on industry entry and exit. Three cases are possible when costs rise: the competitor neutral case, in which entry decreases and exit increases, entrant favoring, in which entry and exit both increase, and incumbent favoring, in which entry and exit both decrease. The model places restrictions on which outcomes are possible given which costs rise (marginal or fixed). The model can be used to examine the impacts of cost-increasing regulation or exogenous process innovation on industry entry and exit.      

Information transmission and incentives not to price discriminate

This paper analyzes how the pricing policy of an incumbent may signal information not only on the demand level but also on the demand composition. A signalling game with two periods and two players (an established firm and a potential entrant) is considered. The potential entrant has incomplete information on market demand. There exist many sequential equilibria in which the uniform price policy acts as an entry deterrence device by hiding actual market profitability. We can interpret the uniform pricing policy as a rejection of the use of superior information on market demand composition in order to reduce the entrant's expected profits.     

Lifetime Employment Contract and Strategic Entry Deterrence: Cournot and Bertrand

This paper is based on a two-stage model of an incumbent firm and a potential entrant, and studies both quantity-setting competition and price-setting competition. We consider a lifetime-employment-contract policy as a strategic commitment that generates kinks in the reaction curve. Furthermore, demand functions are classified into two cases in terms of the strategic relevance between both firms. Therefore, we examine the following four cases: 'quantity-setting competition with strategic substitutes', 'quantity-setting competition with strategic complements', 'price-setting competition with strategic substitutes' and 'price-setting competition with strategic complements'. The purpose of this paper is to analyse entry deterrence in the four cases and to show the effectiveness of the lifetime-employment-contract policy as a result of its analyses.     

RJV FORMATION AND STRATEGIC ENTRY ACCOMMODATION*

This article examines the relationship between cost reduction and public goods effect of research joint ventures (RJVs) and strategic entry deterrence. R&D is process innovation à la Kamien, Muller and Zang (1992 ) and R&D cost sharing between the incumbent and the entrant in a RJV can be asymmetric per Long and Soubeyran (2002 ). It is found that conforming with the conventional wisdom, the incumbents prefer to form RJV to deter entry when the entrant is very inefficient. However, if the entrant is moderately inefficient, it is a better choice for the incumbent to accommodate entry by forming a RJV with it. In contrast, if the entrant is very efficient, then the equilibrium RJV structure depends on the magnitude of spillover effect: it is better to deter entry in the case of high spillover effect.     

Entry and Vertical Differentiation

This paper analyzes the entry of new products into vertically differentiated markets where an entrant and an incumbent compete in quantities. The value of the new product is initially uncertain and new information is generated through purchases in the market. We derive the (unique) Markov perfect equilibrium of the infinite horizon game under the strong long run average payoff criterion. The qualitative features of the optimal entry strategy are shown to depend exclusively on the relative ranking of established and new products based on current beliefs. Superior products are launched relatively slowly and at high initial prices whereas substitutes for existing products are launched aggressively at low initial prices. The robustness of these results with respect to different model specifications is discussed. Journal of Economic Literature Classification Numbers: C72, C73, D43, D83.     

Preemptive Spacing With Vertical Differentiation When Input Quality is of Inelastic Supply

This paper examines a model of vertical differentiation in which an incumbent engages in preemptive spacing to prevent entry. Input quality is of fixed supply, and the incumbent prevents high-end entry by producing a product with all the quality available. It also commits to the production of a minimum-quality product to deter low-end entry. There is no entry in equilibrium, and the incumbent monopolist chooses to sell only its high-quality product. Commitment to the production of the minimum-quality product is used merely as a credible threat to vigorously compete should an entrant also produce a minimum-quality product.     

Strategic Preemption in a Common Property Resource: A Continuous Time Approach

The threat of future entry affects the exploitation of common property resources in important ways. An incumbent has a strategic incentive to manipulate the resource stock to deter entry or to harvest more stock prior to entry rather than share the resource with the entrant. It is possible that the threat of potential entry can lead to the extinction of the resource even though actual competition would result in a steady state with a positive stock level.     

Asymmetric access price regulation in telecommunications markets

In liberalized telecommunications markets, the incumbent typically enjoys several advantages over any entrant. Regulation in such asymmetric markets stimulates competition in the short and the long term if retail prices are low and the entrant's profits are high so that entry is encouraged. I show that asymmetric access price regulation with a cost-based access price for the incumbent and an access markup for the entrant is more successful than cost-based access price regulation applied to incumbent and entrant. This is a robust prediction with respect to the pricing strategies considered. Such asymmetric access price regulation is in accordance with European legislation.     

Campaign War Chests, Entry Deterrence, and Voter Rationality

It is often claimed that the accumulation of "war chests" by incumbents deters entry by high–quality challengers in Congressional elections. This paper presents a game–theoretic analysis of the interaction between an incumbent, potential challengers, an interest group, and a representative (rational) voter, where the incumbent's "quality" (or "legislative effectiveness") is known to the interest group, but not to the voter or to potential challengers. Under certain conditions, a perfectly revealing equilibrium exists; the incumbent signals her quality by raising funds from the interest group to accumulate a war chest. The entry deterrence effect thus operates solely through the role of war chests in signaling incumbent quality.     

RAISING WAGES TO DETER ENTRY INTO UNIONIZED MARKETS*

This paper investigates entry under a unionized oligopoly when entry and wage negotiations are sequential. We find the incumbent has incentives to raise the wage, which strengthens the bargaining position of the union relative to the entrant at subsequent negotiations and thus discourages entry. We show that entry is more likely to be deterred (accommodated) if the union is wage (employment) oriented and that raising unemployment compensation during recession not only reduces the burden of the unemployed but also induces new entry, creating more employment opportunities. However, during a business boom, reducing unemployment compensation is a better policy.     

The welfare effects of entry: the role of the input market

In a successive Cournot oligopoly, we show the welfare effects of entry in the final goods market with no scale economies but with cost difference between the firms. If the input market is very concentrated, entry in the final goods market increases welfare. If the input market is not very concentrated, entry in the final goods market may reduce welfare if the entrant is moderately cost inefficient. Hence, entry in the final goods market is more desirable if (1) the input market is very concentrated or (2) the cost difference between the incumbents and the entrant is either very small or very large. It follows from our analysis that entry increases the profits of the incumbent final goods producers if their marginal costs are sufficiently lower than the entrant’s marginal cost.     

History-based price discrimination and entry in markets with switching costs: A welfare analysis

We analyze history-based price discrimination in an asymmetric industry, where an incumbent, protected by switching costs, faces an entrant who does not have access to information about consumers’ purchase histories. We demonstrate that consumer surplus is higher with uniform pricing than with history-based price discrimination. We find that the entry decision is invariant to whether the incumbent implements history-based pricing or uniform pricing. This implies that the potential abuse of market dominance imposed by history-based price discrimination is exploitation, not exclusion. Finally, we establish that the profit gain to the incumbent from history-based pricing exceeds the associated loss to consumers.     

Strategic sourcing for entry deterrence and tacit collusion

By sourcing key intermediate goods to a potential entrant, an incumbent firm can credibly and observably commit to an intense post-entry competition, thereby deterring the entry. At the same time, a collusive effect exists, whereby the entrant’s loss from staying out of the final-good market is compensated through their sourcing transaction. We find that entry-deterring sourcing in general has ambiguous effect on social welfare. However, there exist scenarios where it enhances not only social welfare, but also consumers’ surplus.