Trigger-Point Mechanism and Conditional Commitment: Implications for Entry, Collusion, and Welfare
Larry D. Qiu
The University of Hong Kong - Faculty of Business and Economics; Hong Kong University of Science & Technology (HKUST) - Department of Economics
Leonard K.H. Cheng
Hong Kong University of Science & Technology (HKUST) - Department of Economics
Michael K. Fung
Hong Kong Polytechnic University - School of Accounting & Finance
Contemporary Economic Policy, Vol. 25, No. 2, pp. 156-169, April 2007
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.
Number of Pages in PDF File: 14
Date posted: March 9, 2007
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