Title: Credible Spatial Preemption Revisited in Entry-Exit Game
Abstract:Much literature investigates that how an incumbent firm deters an entrant firm by crowding in a differentiated product market. However, Judd (1985, RAND) shows that if the incumbent can exit its store...Much literature investigates that how an incumbent firm deters an entrant firm by crowding in a differentiated product market. However, Judd (1985, RAND) shows that if the incumbent can exit its stores after observing entrant’s location, then a spatial preemption is not credible because the incumbent exits its stores to reduce price competition. This paper analyzes an entry-exit game based on Hotelling’s location-then-price competition model on a unit circle. I demonstrate that in some range of entry cost, spatial entry deterrence occurs in a subgame perfect Nash equilibrium if the incumbent can built five stores or more. In this case, the incumbent stays at least two stores so as to keep its market share. Since it intensifies price competition, it lowers an upper bound of entrant’s equilibrium price in subgames and hence entrant’s profit is strictly lower than a situation that only one incumbent store exists. Thus, entrant does not enter the market because its revenue never makes up for its entry cost. It implies that creating many stores itself can serve as a commitment device to crowd in the market.Read More
Publication Year: 2010
Publication Date: 2010-01-01
Language: en
Type: article
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