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Free Riding in Noncooperative Entry Deterrence with Differentiated Products
Author(s) -
Kovenock Dan,
Roy Suddhasatwa
Publication year - 2005
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.1002/j.2325-8012.2005.tb00691.x
Subject(s) - deterrence theory , complementarity (molecular biology) , free riding , economics , product differentiation , microeconomics , deterrence (psychology) , free entry , coordination failure , strategic complements , barriers to entry , pareto optimal , computer science , incentive , market structure , law and economics , biology , genetics , physics , machine learning , cournot competition , nuclear physics , multi objective optimization
We examine free riding and underinvestment in noncooperative entry deterrence in the Gilbert and Vives (1986) model with differentiated products. Our analysis proves that for products that are differentiated enough, when both entry allowing and entry deterring equilibria coexist, the symmetric entry deterring equilibrium may Pareto dominate the entry equilibrium. Hence, “coordination failure” underinvestment in entry prevention can occur. However, as claimed, the overinvestment result of Gilbert and Vives remains robust to moderate amounts of product differentiation. We also show that coordination failure underinvestment arises in a wide variety of entry deterrence models and does not rely on assumptions regarding strategic substitutability or complementarity of precommitments.