Thursday, October 21, 2010

Entry Deterrence in the Presence of Learning-by-Doing

Posted by D. Daniel Sokol

Ana Espinola-Arredondo; Felix Munoz-Garcia (School of Economic Sciences, Washington State University) explain Entry Deterrence in the Presence of Learning-by-Doing.

ABSTRACT: This paper investigates a signaling entry deterrence model under learning-by-doing. We show that a monopolist’s practice of entry deterrence imposes smaller welfare losses (or larger welfare gains) when learning effects are present than when they are absent, making the intervention of antitrust authorities less urgent. If, however, the welfare loss associated to entry deterrence is still significant, and thus intervention is needed, our paper demonstrates that the incumbent’s practice of entry deterrence is easier to detect by a regulator who does not have access to accurate information about the incumbent’s profit function. Learning-by-doing hence facilitates the regulator’s ability to detect entry deterrence, thus suggesting its role as an “ally” of antitrust authorities.

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