Essays in industrial organization
Abstract
The first essay examines the phenomenon of free riding and underinvestment in noncooperative entry deterrence in the Gilbert and Vives (1986) model with differentiated products. Our analysis proves that when both entry allowing and entry deterring equilibria coexist, underinvestment can occur in that the symmetric entry deterring equilibrium may Pareto dominate the unique entry equilibrium. This contradicts Gilbert and Vives' claim that the overinvestment result of their homogeneous product model generalizes to the symmetric product differentiation case. We identify a necessary condition for underinvestment, namely, an incumbent firm's maximum profit from deterring entry must be increasing in the rival incumbent's output at that rival output level at which the firm is indifferent between allowing entry and deterring entry. Our second essay examines the implications of replacing the Cournot market clearing assumption with Bertrand-Edgeworth behavior when production is time-consuming. The benchmark for the analysis is Saloner's (1987) study which shows that when two firms simultaneously choose quantities in each of two production periods before the market clears, every point on the outer envelope of the Cournot reaction functions between the Stackelberg outcomes can be obtained in equilibrium. We demonstrate that this result is not robust to the introduction of Bertrand-Edgeworth competition. When the cost of capacity is small, the Bertrand-Edgeworth leader-follower points lie in the mixed strategy pricing range. Except for these leader-follower points, none of the points on the outer envelope of the capacity best responses which lie in the mixed strategy region can be sustained in a subgame perfect equilibrium.
Degree
Ph.D.
Advisors
Kovenock, Purdue University.
Subject Area
Economic theory|Business costs
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