Deter Entry Research Articles

Upstream Market Foreclosure

This paper investigates how an incumbent monopolist can weaken potential rivals or deter entry in the output market by manipulating the access of these rivals in the input market. We analyze two polar cases. In the first one, the input market is assumed to be competitive with the input being supplied inelastically. We show that this situation opens the door to entry deterrence. Then, we assume that the input is supplied by a single seller who chooses the input price. In this case, we show that entry deterrence can be reached only through merger with the seller of the input.

Advertising and Conspicuous Consumption

The paper formalizes the intuition that brands are consumed for image reasons and that advertising creates a brand’s image. The key idea is that advertising informs the public of brand names and creates the possibility of conspicuous consumption by rendering brands a signalling device. In a price competition framework, we show that advertising increases consumers’ willingness to pay and thus provide a foundation, based on optimization behavior, for persuasive approaches to advertising. Moreover, an incumbent might strategically overinvest in advertising to deter entry, there might be too much advertising, and competition might be socially undesirable.

Do the FCC Policies Promote or Deter Entry? That is the ONLY Question

This Policy Paper submits that in the three years since the passage of the 1996 Act, the FCC has done very little to promote aggressively consumer welfare as the FCC has, in many instances, erected surreptitiously more regulatory barriers to entry than it has removed. Indeed, a brief laundry list of the FCC's anti-entry policies include, but are certainly not limited to: permitting the broadcast, cable and ILEC industries to reconcentrate; failing to enact meaningful access charge and universal service reform; only issuing meaningful collocation rules until over three years after the passage of the 1996 Act; and, on the international front, starting a telecoms trade war that is dangerously close to spiraling out of hand. The root of the problem appears to stem from the fact that despite its stated good intentions, the FCC has failed to admit where it has erred and, more importantly, has refused absolutely to set forth a clear analytical framework to solve the problems of the day. Instead, the Commission continues to engage in a politically driven ad hoc approach that simply cannot be sustained. Given the FCC's recalcitrance and apparent inability to engage in anything substantive, therefore, this paper suggests that the FCC view all of its problems through a simple litmus test: will the FCC's actions promote or deter entry?

The Economics of Price Zones and Territorial Restrictions in Gasoline Marketing

We review explanations for two controversial vertical restraints commonly used in gasoline marketing: price zones and territorial restrictions. After a discussion of the relevant empirical and theoretical economics literature, we consider procompetitive and anticompetitive theories behind the practices. Price zones may be one part of a complicated relationship between gasoline marketers and retailers that facilitates efficient risk-sharing, provides optimal incentives for marketers and retailers, and allows marketers to react more quickly to changes in localized retail competition. Alternatively, if gasoline marketers have substantial market power, price zones may facilitate coordination or help deter entry. Territorial restrictions may prevent inefficiencies in distribution and reduce free-riding on investments marketers make in developing networks of retail stations. At the same time, territorial restrictions help marketers maintain price zones (with the same welfare implications), and may, if marketers have substantial market power, facilitate coordination.

Adjustment Costs of Capital, Pre-Emptive Investments and Industry Structure

Theoretical models of strategic investments indicate that an incumbent firm by making pre-emptive capital investments may restrict an entrant's size and increase its market share, or deter entry. This paper focuses on the incentives of pre-emptive investments to show that upward and downward adjustment costs of capital will be important determinants of the desirability and credibility of pre-emptive investments. This in turn reveals a link between the upward and downward adjustment costs and industry structure. Our empirical results provide some evidence in favor of such a relationship.

Anticompetitive Financial Contracting: The Design of Financial Claims

AbstractThis paper presents the first model where entry deterrence takes place through financial rather than product‐market channels. In existing models, a firm's choice of financial instruments deters entry by affecting product market behavior; here entry deterrence occurs by affecting the credit market behavior of investors towards entrant firms. We find that to deter entry, the claims held on incumbent firms should be sufficiently risky, that is, equity. This contrasts with the standard Brander and Lewis (1986) result that debt deters entry. This effect is more marked the less competitive the credit market is—so more credit market competition spurs more product market competition.

Does Clustering by Incumbent Cable MSOs Deter Entry by Overbuilders?

A large of contiguous cable systems might deter entry or induce exit by overbuilders. To date, there is little empirical evidence relating an overbuilder's entry decision to the size of the incumbent multi-system operator's (MSO's) footprint. By examining the variation in overbuild activity across Census block groups (CBGs) in Michigan, I find that an increase in the size of the cluster significantly decreases the probability of overbuild activity when controlling for all other factors that might influence the entry decision. An application of the model predicts that, by forming even larger clusters of geographically contiguous clusters of cable systems, the 2002 merger between AT&T and Comcast will significantly decrease the likelihood of entry by overbuilders in Michigan. To the extent that overbuilders constrain the pricing decision of incumbent MSOs, clustering might yield higher prices for cable television consumers.

Licence horizontale et politique antitrust

This paper investigates how licensing between competitors can create significant barriers to competition. Several theoretical models have shown that licensing an innovation to a competitor can facilitate collusion, deter entry by more efficient firms or hinder technological progress. As a result, antitrust authorities are now paying close attention to such behavior, mainly in the case of cross licensing. However, the anticompetitive effects of licensing rely on several assumptions, which are seldom met. Moreover, evaluating these anticompetitive effects is not easily done for licensing also has some efficiency-enhancing aspects : for instance, it can help manufacture a new product (in the case of the licensing of complementary technologies) or it may avoid excessive R&D investments.

Conduct in a Banking Monopoly

Extending previous empirical work on concentrated markets, this paper appliesa Rosse–Panzar revenue test to quarterly data from a monopoly bank. The testrejects the hypotheses of static monopoly pricing or perfectly contestablepricing. Other tests suggest that the bank was in long-run equilibrium duringthe sample period and did not exhibit particular forms of expense-preferencebehavior. Possible interpretations of the bank's conduct include limit pricingto deter entry or an objective other than maximizing static profit. The resultsraise new questions about conduct among monopoly banks or in declining markets.

Can low-price guarantees deter entry?

This paper examines the strategic use of low-price guarantees (LPGs) as an entry deterrent. The entire space of contemporaneous LPG messages is partitioned according to their ability to deter entry and/or increase the incumbent’s profits. While most price-matching and price-beating guarantees cannot deter entry into a perfectly contestable market, there do exist special classes of price-beating guarantees that enable the incumbent to prevent entry. Interestingly, both price-matching and price-beating can be a part of the incumbent’s strategy in subgame perfect equilibria of the game where the firms choose LPGs from 14 classes defined in the paper.

Pricing a Network Good To Deter Entry

This paper develops a model of pricing to deter entry by a sole supplier of a network good. We show that the installed user base of a network good can serve a preemptive function similar to that of an investment in capacity if the entrant’s good is incompatible with the incumbent’s good and there are network externalities in demand. Consequently, the threat of entry can lead the incumbent to set low prices. We identify some factors that should be considered in thinking about the welfare effects of entry deterrence in this and similar models.

Corporate responses to segment disclosure requirements

This paper shows through increasing disclosure requirements may induce firms to reduce their value-relevant disclosures. In the absence of segment reporting requirements, an incumbent firm may voluntarily disclose value-relevant information because it can use other, value-irrelevant, information to jam proprietary disclosures. However, when required to disclose segment data, the incumbent may aggregate proprietary information with other value-relevant information to deter entry by a rival. Hence, the firm does not disclose value-relevant information it would have revealed voluntarily in the absence of segment disclosure requirements. In such situations, requiring more disaggregate disclosures can actually decrease price efficiency.

Multiple Market Entry, Cost Signalling and Entry Deterrence

A low-cost incumbent may limit price to informatively signal her cost to an uncertain potential entrant, and therefore deter entry. We enrich this model by investigating the strategic pricing behavior of the incumbent when she operates in multiple markets. We demonstrate that the low-cost incumbent's ability to separate from a ghost high-cost type is enhanced when she combines her signalling effort across markets, instead of independent signalling in each market. We show that, in the combined least-cost signalling, the low-cost incumbent limit prices in each market. In an attempt to minimize dissipative but informative signalling costs, the low-cost incumbent may enter unprofitable markets, but exit after credible separation.

Incumbency Advantage, Voter Loyalty and the Benefit of the Doubt

The standard Downsian model of two-party competition cannot account for the well-known fact that incumbents rarely lose elections. This paper modifies the model to take account of the tendency for voters to give the incumbent the `benefit of the doubt'; i.e. voters may vote for an incumbent even when they prefer the policies of the challenger. We show that if all of the voters give the incumbent a very small benefit of the doubt, or if only a few voters give a larger benefit of the doubt, the incumbent may become invulnerable to defeat by any challenger, especially if his position is a relatively central one relative to voter ideal points. We also show that taking account of voter willingness to give some form of benefit of the doubt to incumbents also helps us to understand why politics deviates from the standard Downsian model in two other ways: (1) tweedledum-tweedledee politics is uncommon, and (2) incumbents often win by much larger than bare majorities. Data on attitudes toward government jobs policy and on US involvement in Central America, as reported in the 1984 NES survey, are used to illustrate that the more centrally located the incumbent, the smaller the benefits of the doubt that are required to ensure re-election. In an Appendix we present a number of new and useful theorems about the stability properties of situations in which voters provide incumbents with some form of benefit of the doubt. Our results show how voter willingness to give incumbents benefit of the doubt can make incumbents, especially centrally located ones, virtually impossible to defeat. Thus, `benefits of the doubt' serve to reduce competition and deter entry.

Entry, Sunk Costs, and Market Structure

Typically, models that study the role of sunk costs suppose that incumbent firms face entry by a single firm each period. In this paper, the set of equilibrium market structures that result when all firms are free to enter or exit and set prices each period are characterized. The effect of sunk costs on the market structure is examined and it is shown that sunk costs can take on various forms, each having a different effect on the set of equilibrium market structures. Costs that are sunk due to the existence of product- specific capital do not in general deter entry. Rather, entry deterrence is a necessary outcome only when costs are sunk due to the time it would take to leave the market.

Oligopolistic Entry Deterrence under Incomplete Information

Recent work has investigated the effects of asymmetric information between an incumbent firm and a potential entrant. This study extends the analysis to allow the initial market structure to be a noncooperative oligopoly. We show that there is a Bayesian Nash equilibrium in which the incumbent firms, although unable to collude, strategically deter entry that would have occurred under complete information. In contrast to the past limit-pricing literature, it is a high price that deters entry as it signals to the potential entrant that this is a high-cost industry. Extending the model to allow for multiple potential entrants, we find that increasing the degree of potential competition raises the preentry price and reduces the likelihood of entry.

Optimal oligopoly pricing and the threat of entry: Canadian evidence

In earlier work we tested stochastic/dynamic limit pricing using U.S. data. We replicate these tests using Canadian data. The results are weak, but consistent with the earlier tests. Along the way we deal with several methodological problems: How does the new ‘rational limit pricing’ relate to the test? How might oligopoly influences be integrated into limit pricing? How should existing concentration affect entrant behavior? Might factors which suppress industry profitability not, ceteris paribus, deter entry? What might one do with correlated proxy variables? Should ‘weak’ results be interpreted the same in a replication test, as in a de novo test?

Can Product Differentiation Deter Entry?

‘Product differentiation’ has frequently been held responsible for hindering new entry to an industry. Whether this can be a theoretical possibility depends on the exact interpretation given to the phrase. This paper shows how, from the commonly accepted meanings of the term (for example, dissimilarity in characteristics), product differentiation is actually likely to encourage entry. Only when the phrase is taken to be synonymous with advertising or some kind of demand advantage is there scope for an entry barrier effect. It is recommended that in order to avoid future confusion, more precise terminology is adopted.