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The B.E. Journal of Economic Analysis & Policy

Editor-in-Chief: Jürges, Hendrik / Ludwig, Sandra

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Volume 7, Issue 1 (Apr 2007)

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Volume 1 (2001)

Entry Deterrence in a Duopoly Market

James D. Dana Jr.
  • 1Kellogg School of Management, Northwestern University,
/ Kathryn E. Spier
  • 2Kellogg School of Management and School of Law, Northwestern University and NBER,
Published Online: 2007-04-06 | DOI: https://doi.org/10.2202/1935-1682.1653

Abstract

In a homogeneous good, Cournot duopoly model, entry may occur even when the potential entrant has no cost advantage and no independent access to distribution. By sinking its costs of production before negotiating with the incumbents, the entrant creates an externality that induces the incumbents to bid more aggressively for the distribution rights to its output. Each incumbent is willing to pay up to the incremental profit earned from the additional output plus the incremental loss avoided by keeping the output away from its rival. This implies that the incumbents are willing to pay up to the market price for each unit of available output. A sequential game in which the incumbents produce first is analyzed, and the conditions under which entry is deterred by incumbents' preemptive capacity expansions are derived.

Keywords: Cournot duopoly; entry deterrence

About the article

Published Online: 2007-04-06


Citation Information: The B.E. Journal of Economic Analysis & Policy, ISSN (Online) 1935-1682, DOI: https://doi.org/10.2202/1935-1682.1653.

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