Strategic models of entry deterrence

Abstract

In the 1980s the literature of economics and law concerning industry structure bloomed with articles on strategic aspects of entry deterrence and competition for market shares. These articles criticized and amended theories that incompletely or inconsistently accounted for strategic behavior. The aftermath is that game-theoretic models and methods are standard tools of the subject — although not always to the satisfaction of those concerned with empirical and policy issues; cf. Fisher (1989) for a critique and Shapiro (1989) for a rebuttal. This chapter reviews briefly the popular formulations of the era and some interesting results, but without substantive discussion of economic and legal issues. The standard examination of the issues is Scherer (1980) and game-theoretic texts are Fudenberg and Tirole (1991) and Tirole (1988); see also Salop (1981). Issue-oriented expositions are the chapters by Gilbert (1989a) and Ordover and Saloner (1989) in The Handbook of Industrial Organization. Others emphasizing game-theoretic aspects are Fudenberg (1990), Fudenberg and Tirole (1986c), Gilbert (1989b), Milgrom (1987), Milgrom and Roberts (1987, 1990), Roberts (1987), and Wilson (1985, 1989ab). The combined length of these surveys matches the original articles, so this chapter collects many models into a few categories and focuses on the insights offered by game-theoretic approaches. The motives for these studies are the presumptions, first, that for an incumbent (unregulated) firm one path to profits is to acquire or maintain monopoly power, which requires exclusion of entrants and expulsion, absorption, intimidation, or cartelization of competitors; and second, that monopoly power has adverse effects on efficiency and distribution, possibly justifying government intervention via antitrust and other legal measures. We examine here only the possibilities to exclude or expel entrants. A single issue motivates most game-theoretic studies: when could an incumbent