Wednesday, June 24, 2015

Empire-building and Price Competition

Antoine Pietri (University Paris 1, CES), Tarik Tazdait (CNRS, EHESS, CIRED), and Mehrdad Vahabi (University Paris 8, CES) discuss Empire-building and Price Competition.

 This paper examines the relevance of price competition in the protection market in order to explain the different modes of empire-building. Our approach unravels the economic rationale of merchant empires which is not explicable with existing theoretical frameworks systematically eluding price competition. Our main contribution is to introduce a distinction between two different types of rent, namely an ‘absolute’ and a ‘differential’ one. Absolute protection rent (AR) corresponds to rents extracted by sellers of protection (empires) using threats and coercion. In contrast, differential protection rent (DR) stands for economic advantages conferred on subjects of an empire. The choice of the territorial expansion rule (AR-maximizing or DR-maximizing) depends on the nature of the protection market which is influenced by the assets structure detaining by the buyers of protection. In this paper, we build a general framework consistent with historical ! evidence in which coercive rivalry appears to be one case of empire-building among others (including price competition).

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