are judges leading economic theory sunk costs the threat of entry and the competitive process in this paper we attempt to bring theoretical form to a particular entry argument that has found favor in the courts we suggest that sunk costs may not be a major impediment to entry when a group of customers can commit to an entry enhancing strategy buyers have strong incentives to adopt such strategies because they benefit directly from the resulting lower prices the simplest example involves a large buyer that is able to guarantee an entrant a market for its product long term contracts or even informal purchase commitments backed by customer reputation may also allow the entrant to obtain a guarantee of sufficient business to make the entry profitable once entry is thought likely to occur the existing competitors may be unwilling to attempt a price increase of any magnitude thus the threat of entry can maintain competitive prices even in the presence of sunk costs in section ii we motivate the analysis by discussing the current controversy over the role entry conditions play in an antitrust merger review then we discuss the necessary assumptions for a model of how the threat of entry can deter any price increase in the presence of sunk costs we note that these conditions are different from those commonly used in the economic literature

technology adoption government policy and tariffication abstract we integrate trade policy into an open economy model of technology adoption to investigate the impact of alternate trade barriers on the equilibrium diffusion of a cost saving technology it is shown that even when ad valorem tariffs have a neutral impact on technology adoption non tariff barriers such as quotas can be used to affect the speed of technology diffusion in both the home and foreign countries in addition we demonstrate how in an open economy setting tariffication i e the conversion of quotas to ad valorem tariffs can lead to faster technology adoption world wide

trade policy in a super size me world abstract when a foreign monopolist sets a single market clearing price for its product the sign of the optimal tariff is determined by the extent of pass through also known as the terms of trade effect however when a foreign monopolist employs a second degree price discrimination mechanism in the domestic market the calculus of welfare maximization is very different while there are still terms of trade effects from the imposition of a tariff the existence of such effects are neither necessary nor sufficient to determine the sign of the optimal tariff instead the distribution of valuations within the population is the key determinant of the nature of policy intervention this result differs significantly from the uniform price case and is driven by the incentive compatibility constraint which places the distribution of types at the center of the analysis if there is a relatively large fraction of high valuation types in the population then domestic information rents may be increased by subsidizing imports thereby increasing the consumption of the low valuation types and moving the incentive constraint in favor of the high valuation types however if the share of high types in the population is relatively small then the increase in information rents will also be small but the fiscal implications of a subsidy will be large consequently the optimal policy will be to impose a trade tax

dynamic limit pricing and internal finance abstract this paper examines a model of dynamic limit pricing with a profit maximizing fringe constrained to finance new investment from internal finance in a differential game the dominant firm controls price thereby determining the current earnings of the fringe while the fringe chooses its optimal retention ratio if market growth is less than the discount rate an important feature of the solution is that price must eventually drop to the fringe long run cost of production if market growth is initially rapid the dominant firm is much more aggressive in limiting fringe growth

endogenous sequential entry in a spatial model in this paper we simulate a sequential entry of firms in a differentiated industry a la hotelling firms select a product location once for all they are aware of the unique price equilibrium that will take place after entry has occurred and take into account the behaviour of subsequent entrants it is found that early entrants will systematically locate around the centre but in such a way as not to induce later competitors to locate in between them location choices are also investigated as an instrument for entry deterrence which is feasible because of a fixed cost we identify several ranges of fixed cost for which entry is innocently deterred corresponding to a natural monopoly duopoly triopoly entry deterrence is then typically used to stretch the range of fixed cost for which a given number of firms can be sustained deterrence strategies are consistently such that firms locate at more regular intervals

liberalization quality and welfare removing the italian ver on japanese car exports the empirical evidence that evaluates ex post the effects of trade policy confirms the presumption well known in theory that quantitative barriers to trade have an impact on the average quality of exports yet in evaluating ex ante the effects of trade policy reform very few studies take into account the role of the induced change in quality the paper evaluates the effects of liberalization in the italian car market through a calibrated model where the choice of the quality of exports is made endogenous simulating the removal of the ver on japanese exports there are substantial gains from liberalization when only quantity effects are considered results change dramatically if quality effects are taken into account the downgrading in japanese exports entails a strong reduction in consumers gains

advertising sunk costs and barriers to entry this paper tests hypotheses about the entry deterring effects of advertising the model isolates three separate effects of advertising on entry the effect on the irrecoverable costs of entry the effect on the uncertainty underlying the entry environment and the effect on the measured rates of profit we find that advertising impedes entry since necessary advertising expenditures give rise to a sunk cost which raises the risk of entry however we also find a countervailing force due to advertising in that the entrant perceives a greater likelihood of success in markets where advertising is important our analysis shows that the overall impact of advertising on entry is positive

optimum tariffs for vertically differentiated products with an application to indian tea exports optimum export tariffs are typically related to the elasticity of demand for exports in homogeneous goods markets in this paper we set up a simple model for large exporters of quality differentiated products and estimate optimum tariffs based on the quality of the good restrictions on demand parameters implied by the theoretical model are used in estimating demands for different qualities of indian tea exports we use the estimated model to find optimum tariffs for two qualities of indian tea exports and find that optimum export tariffs for high quality teas should on average be 14 higher than the tariff on low quality tea exports

why is there no revolution in north korea the political economy of revolution revisited the paper critically assesses the acemoglu robinson approach to revolutions as it is focused on inequality of wealth or income rather than on collective action problems we show that income inequality is not a sufficient and not even a necessary condition for a revolution to occur rather a necessary condition for a revolution is that any subpopulation can expect net benefits from it for which inequality is not a precondition as a result a certain structure of commitment devices or their absence rather than inequality is crucial for explaining why revolutions sometimes occur and sometimes not

location choice product proliferation and entry deterrence within a slightly modified version of hotelling s model we reconsider the claim that the threat of entry induces existing firms to produce a larger number of products than they would otherwise we show that entry deterrence although optimal need not be achieved through product proliferation in some cases the incumbent monopolist resorts to an entry deterring strategy based on location choice rather than product proliferation we also show that in some cases the number of products chosen by the incumbent facing the threat of entry is strictly greater than the minimum number required to deter entry

reputation and imperfect information abstract a common observation in the informal literature of economics and elsewhere is that is multistage games players may seek early in the game to acquire a reputation for being tough or benevolent or something else but this phenomenon is not observed in some formal game theoretic analyses of finite games such as selten s finitely repeated chain store game or in the finitely repeated prisoners dilemma we reexamine selten s model adding to it a small amount of imperfect or incomplete information about players payoffs and we find that this addition is sufficient to give rise to the reputation effect that one intuitively expects

noncooperative behavior by a cartel as an entry deterring signal recent work has investigated the effect of a potential entrant s uncertainty about postentry profits on the likelihood of his entering the market it has always been assumed that the potential entrant knows the type of postentry solution but lacks information on cost or as to whether the postentry solution will be cooperative or noncooperative we find that entry is more likely the greater is the preentry profit rate in equilibrium the threat of entry then forces the incumbent firms to act more competitively to deter entry

predation among supermarkets an algorithmic locational analysis abstract first an algorithm that finds certain polygonal tesselations of r 2 is described the polygons involved here are market areas of supermarkets in a city defined by prices and transport cost proportional to euclidean distance then statistics based on the adjacencies boundaries and sizes of all market areas in edmonton canada during 1959 1973 are used to test hypotheses on locational predation

protection and the product line monopoly and product quality the product line decision of a monopolist is analyzed and used to study the effect of specific and ad valorem taxes on the entire product line while specific taxes or quotas raise average quality ad valorem taxes may not the welfare consequences of such policies when the monopolist is a home one and when he she is a foreign one are discussed with a home monopolist both specific and ad valorem subsidies are welfare improving while with a foreign monopolist their welfare properties depend on the distribution of consumers copyright 1990 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

excess capacity and entry some empirical evidence recent articles by spence i977 dixit i979 and schmalensee i98i have elaborated on wenders i97i1 proposition that excess capacity can act as a barrier to entry the intent of all of these treatments is to suggest that firms may rationally invest in excess capacity with the expectation that excess capacity will be seen by potential entrants either as a signal of aggressive intent or as a credible threat 2 when excess capacity does not lead to creation of a credible threat it may still act as a barrier to entry by shifting the risk return perceptions of potential entrants enough to divert the potential entrants investments into other industries 3 alternatively investment in excess capacity by incumbent firms may reduce the prospects of an active market for the used equipment of a defunct entrant and thereby help to convert fixed costs into sunk costs consequently raising entry barriers 4 this paper represents an exploratory effort to investigate empirically the prevalence and efficiency of excess capacity in deterring entry first a simple and traditional model of entry is presented this is followed by the description of the data used to explore the excess capacity investment concept a combined results and comments section follows the description of the data

limit price entry prevention when complete information is lacking abstract this paper extends an earlier paper by the author in which there were two economic agents an established firm and a potential entrant operating under complete information each agent being assumed to know the profit functions of both firms the present paper extends some of the results of the earlier work to a model in which it is not known with certainty to either agent what the profit functions would be after the entrant would come into the market

product imitation product differentiation and international trade using the hotelling approach to product differentiation this article derives the equilibrium product configurations and prices when two firms enter and sell in two interdependent markets separated by barriers to trade it shows that product imitation and no trade as well as product differentiation with two way or one way trade are all consistent with the equilibrium copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

quality choice trade policy and firm incentives quality choice is examined in a duopoly with one foreign and one domestic firm where consumers have similar preferences for quality but different preferences for brands firms make quality commitments prior to choosing price and policy intervention assumes several forms the policy conclusions depend on whether firms face set up costs in raising product quality in the absence of set up costs both domestic and foreign firms make socially optimal quality choices in the presence of set up costs the foreign firm and often the domestic firm sets quality below the socially optimal level incomplete information alters these conclusions however copyright 1992 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

protection and the product line a comment this paper reconciles conflicting hypotheses about the effect of ad valorem tariffs on the quality composition of imports contrary to recent argument it is shown that the effect is independent of market structure the effect depends instead on whether or not consumers are restricted to purchasing only one variety copyright 1992 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

strategic entry deterrence in analyzing deterrence of large scale entry two classes of entry barriers may be distinguished an innocent entry barrier is unintentionally erected as a side effect of innocent profit maximization in contrast a strategic entry barrier is purposely erected to reduce the possibility of entry two types of innocent barriers may also be distinguished a postentry absolute advantage has the property that if entry did occur the established firm would be at a profit advantage over the entrant examples are superior technology or product design patents and lower input prices a preentry asymmetry advantage arises from the fundamental preentry asymmetry between established firm and potential entrant before the entrant makes his entry decision the established firm has already committed resources this prior existence gives first move advantages the preentry asymmetry is independent of symmetry or asymmetry in the rules the equilibrium concept of the postentry game that might ensue even if the postentry game will be played according to nash cournot or entrant as leader rules the preentry leadership

action characteristics as predictors of competitive responses a central question in competitive dynamics is whether a competitive response can be predicted this study links various characteristics of actions with the total number and the time lag of competitors responses the hypothesized relationships were tested with a sample of competitive moves among u s airlines the results suggested that responses are influenced by the characteristics of the actions that evoked them specifically the total number of competitors affected by an action and the importance to these competitors of the markets under attack by the action increase the number of competitive responses strategic as opposed to tactical actions or actions which require substantial implementation efforts reduce the number and delay the timing of rivals counteractions finally contrary to prediction competitors who have a high stake in the markets under attack by a competitive move react slowly

empirical tests for predatory reputation in our earlier studies of the supermarket industry in edmonton alberta we tested for predation in a spatial setting and found evidence which supported the predation hypothesis in this paper we use data on the locations entry exit and market area populations of supermarkets in edmonton to test whether the entry deterrence and timing of expansion implications of the reputation hypothesis are confirmed we find that our time series data are consistent with entry s being deterred and with delayed opening of new supermarkets by the dominant established firm

the politico economic behavior of authoritarian governments the study of the interaction between the economic and political behavior of governments in democratic western capitalist countries has yielded many insights in the three decades since anthony downs an economic theory of democracy was published in 1957 similarly the study of the overt political component of the economic decision making process in authoritarian eastern centrally planned economies has attained a great degree of refinement in the post stalin era for most countries in the world however neither model democratic curn capitalist nor authoritarian curn centrally planned applies very well rather there is a third type more or less authoritarian curn more or less capitalist which reasonably describes a large number of developing countries it is likely that the behavior of these countries governments will not be well explained by models which fit the other two types the purpose of this paper is to propose a framework in which the economic decisions of authoritarian governments can be analyzed without assuming that the government is the only economic agent thus in basically capitalist countries where elections are not the means by which power is validated and transferred 1 the political economic behavior of government an individual s first formal exposure to economics is usually a principles text in early chapters of most of them the economic system is described as being determined by the interaction among three groups of economic agents households firms and governments the latter which only began to be considered an economic agent of important status with the advent of keynesian analysis is in such texts initially accorded a place of equality with the other two but soon is presumed to behave entirely differently while households and firms exhibit maximizing behavior in their own self interest the government s economic actions are motivated by a desire to stabilize and

the role of potential competition in industrial organization potential competition has been recognized as a mechanism to control the exploitation of market power at least since the work of j b clark 1902 but it was not until 50 years later that economists most notably joe bain and paolo sylos labini refocused attention on the idea with inputs from the theories of imperfect competition optimal control and dynamic games their work evolved into ever more sophisticated models of the reactions of existing competitors to the threat of new competition although the most appropriate models of competitive interaction are those which begin with a specific industry a number of theories have been proposed which attempt to develop more general conclusions my purpose in this paper is to develop an understanding of the strengths and limitations of these alternative theories by examining the available theoretical empirical and institutional knowledge rather than attempt the sisyphean task of recounting every model which relates conditions of entry and market performance i have partitioned the analysis into four major schools of thought according to their most central propositions these are the traditional model of limit pricing dynamic limit pricing the theory of contestable markets and the market efficiency model traditional limit pricing models rest on the assumption that firms respond to entry but are able to earn persistent profits when the structural characteristics of markets make entry difficult dynamic limit pricing is similar but emphasizes that markets can only be temporarily protected from entry contestability theory in its pure form asserts that potential competition is as effective as actual competition in controlling market performance the efficient markets hypothesis broadly interpreted states that markets are workably competitive and that the market structure reflects differential efficiency not strategic behavior while one can construct many other hypotheses about potential competition these classifications

predation reputation and entry deterrence abstract economists often argue that predatory practices are irrational since there exist cheaper or more certain means to gain or maintain a monopoly our gametheoretic equilibrium analysis suggests that if a firm is threatened by several potential entrants then predation may be rational against early entrants even if it is costly when viewed in isolation because it yields a reputation which deters other entrants asymmetric information plays a crucial role in our analysis since it provides the rationale for entrants to base their expectations of the firm s future behavior on its past actions the analysis also suggests methods to treat general reputational phenomena

strategic behaviour of incumbent firms in the uk abstract the main purpose of this paper is to examine the incidence of strategic behaviour in the uk by means of a questionnaire study performed across three broad manufacturing industries food electrical engineering and chemicals of the strategies which have received substantial theoretical attention r d and advertising appear widely used patenting pricing and excess capacity much less so vertical instruments such as purchasing policy also stand out as important but possibly only a minority of firms in our sample actively pursue strategic instruments

the political economy of development a cross national causality test of development democracy growth hypothesis the empirical investigation of the development democracy growth hypothesis estimates positive correlations and causal associations between development and democracy and democracy and growth among the preconditions for the emergence of democracy market and culture show strong and highly significant positive effects which are largely transmitted directly development affects democracy directly and indirectly via education and investment the positive causal association between democracy and growth is transmitted both directly and indirectly via labor and welfare accordingly the hypothesized compatibility between economic development and political democracy is confirmed while rejecting the trade off between political democracy and economic growth

pricing to market price discrimination or product differentiation we employ a vertical differentiation model to examine the potential bias in pricing to market results when using export unit values aggregating differentiated products our results show that i false evidence of pricing to market is always found when using unit values whether the law of one price holds or not and ii the size of the bias increases with the level of product differentiation our simulation results support those conceptual findings thus some of the positive pricing to market results in the literature could be an artifact of the product heterogeneity embodied in unit values rather than evidence of imperfect competition

on protection and the product line a reply this reply shows that both market structure and the form of preferences affect the argument by r falvey 1979 on ad valorem tariffs and the quality of imports it does not depend on whether or not consumers are restricted to purchasing only one variety copyright 1992 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

on democracy and debt as we explained there is really little a priori reasoning for a clear prediction that authoritarian regimes will incur more foreign debt in fact some other empirical literature reveals that such regimes will face a higher supply price for such debt anderson presents a study of a single year using an admittedly crude measure of authoritarianism that finds that such regimes do issue more debt

political systems and distortions an empirical study this paper studies empirically why price distortions are more prevalent in some countries than in others we find no significant difference between democracies and dictatorships but frequent regime changes reduce distortions political systems factional subordinate that encourage redistributive activities rda tend to have more distortions allowing for different effects of rda in democracies and dictatorships there is a positive and significant effect of rda on distortions in dictatorships in democracies distortions destroying lobbying seems more important since no significant relation between rda and distortions can be found

caveat innovator strategic and structural characteristics of new product introductions abstract the assumptions underlying models of strategic behavior by incumbents are evaluated using a case study of a ground coffee product introduction the assumption underlying earlier strategic models that the entrant does not know the incumbent s payoffs after strategic have been tested does not appear to apply instead strategic behavior is observed to hinge on ex ante uncertainty about the structure of the payoff matrix and the incremental decision making which this uncertainty spawns in this environment strategies which create noise can slow learning and delay entry

product differentiation and oligopoly in international markets the case of the u s automobile industry this paper develops and estimates a model of the u s automobile industry on the demand side a discrete choice model is adopted that is estimated using micro data from the consumer expenditure survey the estimation results are used in conjunction with population weights to derive aggregate demand on the supply side the automobile industry is modelled as an oligopoly with product differentiation equilibrium is characterized by the first order conditions of the profit maximizing firms the estimation results are used in counterfactual simulations to investigate two trade policy issues the effects of the ver and exchange rate pass through

predatory reputation in us airline markets abstract despite its long history in antitrust policy predation remains a poorly understood phenomenon the main difficulty is in empirically identifying predatory intent i propose a method for measuring the effect of reputation whose significance would enable us to infer predatory intents maximum likelihood estimation using simulated annealing algorithm is conducted with a sample of us airline markets the results provide some support for the presence of entrants learning and reputation effect as an application i discuss how the outcomes of my empirical model could help analyze such antitrust cases as the american airlines case