Strengthening a Weak Rival for a Fight

Byford, M and Gans, J 2019, 'Strengthening a Weak Rival for a Fight', International Journal of Industrial Organization, vol. 63, pp. 1-17.

Document type: Journal Article
Collection: Journal Articles

Title Strengthening a Weak Rival for a Fight
Author(s) Byford, M
Gans, J
Year 2019
Journal name International Journal of Industrial Organization
Volume number 63
Start page 1
End page 17
Total pages 17
Publisher Elsevier BV
Abstract We provide a new model wherein firms of different productivities survive in an industry despite the threat of entry by high productivity firms. We demonstrate that an efficient incumbent has a unilateral incentive to establish a relational contract, softening price competition to strengthen its inefficient rival in a war of attrition that emerges post-entry, and raising the price of the inefficient firm in the acquisition market. We show that this equilibrium gives rise to persistent performance differences, market compression, and stability in the identity of firms in the market. Moreover, the relational contracting equilibrium is facilitated by strong anti-trust laws.
Subject Industry Economics and Industrial Organisation
Microeconomic Theory
Keyword(s) Persistent performance differences
Strategic barriers to entry
War of attrition
Spatial competition
DOI - identifier 10.1016/j.ijindorg.2018.10.005
Copyright notice © 2018 Elsevier B.V. All rights reserved.
ISSN 0167-7187
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