Markets Linked by Rising Marginal Costs: Implications for Multimarket Contact,Recoupment, and Retaliatory Entry |
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Authors: | Zhiqi Chen Thomas W. Ross |
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Affiliation: | (1) Department of Economics, Xiamen University, Xiamen, Fujian, China;(2) Department of Economics, Carleton University, Ottawa, ON, Canada, K1S 5B6;(3) UPS Foundation Professor of Regulation and Competition Policy, Sauder School of Business, University of British Columbia, 2053 Main Mall, Vancouver, BC, Canada, V6T 1Z2 |
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Abstract: | This paper studies the effects on prices and welfare of multimarket contact when firms serve multiple markets from a single facility with rising marginal costs. Here a link is created between markets, even with independent demands: greater output in one market leads to a higher marginal cost and lower output in other markets; and multimarket contact can indeed lower welfare. Variations of the model can explain two other puzzling phenomena: “recoupment” – lower prices in one market “paid for” by higher prices in other markets; and “retaliatory entry” – the credible threat to enter a rival’s market if it enters yours. |
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Keywords: | Rising marginal costs Multimarket contact Recoupment Entry deterrence Chain stores Conglomerate mergers |
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