Technology Inertia and the Benefits of Entry

Emanuele Bacchiega 1 , 1  and Paolo G. Garella 2 , 2
  • 1 Alma Mater Studiorum - Università di Bologna, emanuele.bacchiega@unibo.it
  • 2 Università degli Studi di Milano, paolo.garella@unimi.it

Abstract

We study the effects of entry on price in an industry. This assessment is usually carried out under the implicit assumption of “technological inertia”: incumbents cannot change their technologies in response to entry. We remove this assumption by modeling a game where, before quantity competition, firms choose technologies. We identify parameter configurations where, after entry, the incumbent(s) changes technology. This leads either to a higher price after entry or to a “dampening effect” on price reduction. This effect is shown to be relevant when evaluating the welfare gains from measures intended to foster competition by increasing the number of competitors. The converse proposition could be stated for evaluating the social costs of mergers.

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The B.E. Journal of Economic Analysis & Policy (BEJEAP) is an international forum for scholarship that employs microeconomics to analyze issues in business, consumer behavior and public policy. Topics include the interaction of firms, the functioning of markets, the effects of domestic and international policy and the design of organizations and institutions.

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