Abstract
We provide a new model that generates persistent performance differences amongst seemingly similar enterprises; a mechanism whereby an efficient incumbent gives permission for an inefficient rival to exist in the presence of efficient entrants. We demonstrate that the efficient incumbent has a unilateral incentive to establish a relational contract, softening price competition to strengthen the inefficient firm in a war of attrition that emerges post-entry, and raising the price of the inefficient firm in the acquisition market. We show that performance differences are likely to be associated with market compression, stability in the identity of firms in the market, and stronger anti-trust laws.
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