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TRIGGER‐POINT MECHANISM AND CONDITIONAL COMMITMENT: IMPLICATIONS FOR ENTRY, COLLUSION, AND WELFARE
Author(s) -
QIU LARRY D.,
CHENG LEONARD K.,
FUNG MICHAEL K.
Publication year - 2007
Publication title -
contemporary economic policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.454
H-Index - 49
eISSN - 1465-7287
pISSN - 1074-3529
DOI - 10.1111/j.1465-7287.2006.00028.x
Subject(s) - sunk costs , collusion , microeconomics , economics , welfare , incentive , investment (military) , social welfare , dilemma , government (linguistics) , point (geometry) , competition (biology) , market economy , ecology , philosophy , linguistics , geometry , epistemology , politics , political science , law , biology , mathematics
When fixed, sunk investment costs are high, firms may not have sufficient incentive to enter the market unless future entry is constrained. In this case, the government faces a dilemma between a full commitment and noncommitment of restricted future entry. A way out is to consider a commitment conditional on the realization of the uncertain parameters, such as the trigger‐point mechanism (TPM) that sets conditions on current production level, excess capacity, and demand growth under which future entry will be allowed. This article shows that the TPM facilitates the incumbents’ collusion but may improve social welfare under certain circumstances. ( JEL L13, L43, L50, H10, H54)