Entry Deterrence.ppt

Entry Deterrence Why Entry is Bad (A Reminder) More firms means a smaller share of the pie even if prices are unaffected. More firms means it is harder to sustain tacit collusion. Hence prices could fall as well. For Some Firms Entry not an Issue Legally protected monopoly Patents, copyrights, other IP Exclusivity Various telecom in “old” Europe Post office in America Spectrum, bandwidth limits Economies of scale create “natural” monopoly Land-line telecom Cable TV Electricity transmission Network externalities eBay Windows The Problem The Problem More Generally Remember: Game Theory as the Ghost of Christmas Future Need to take steps today that make fighting credible; or make entry unattractive; i.e., Es Ea; or develop a reputation for being crazy; or develop a reputation for fighting; or signal toughness. Make Fighting Credible Install “doomsday devices” For example advertise heavily that you will beat any competitors price. build excess capacity to make Bertrand competition credible. Excess Capacity as Doomsday Device Consider a monopoly incumbent deciding how much capacity to build. Na?ve approach is to build capacity equal to demand at the monopoly price. Why na?ve? Because typically at monopoly output, there is sufficient demand to attract entry. Moreover, because incumbent has limited capacity, it is constrained to cooperate (avoid the Bertrand trap). Excess Capacity as Doomsday Device Suppose prior to entry, however, incumbent builds enough capacity to serve all demand at any price above marginal cost. Now if entrant enters, the firms risk being in the Bertrand trap, because incumbent has capacity to serve the entire market at a price equal to marginal cost. Entrant is deterred from entering (as long as it believes Bertrand competition will ensue). A Caveat on Capacity as a Doomsday Device Just because incumbent alone has this capacity doesn’t guarantee Bertrand trap if entry – need to have reason to think incumbent will “pull the trigger.” Incumbent enj