25 Pages Posted: 6 Jul 2011
Date Written: July 4, 2011
A production market with given preferences, technology and competition technology is vulnerable if it admits both perfect competition and monopoly or oligopoly. Under decreasing returns, sunk costs combined with a potential for monopoly profits provide a sufficient basis for vulnerability. A large agent can establish monopoly by installing enough productive capacity. The monopolist deters entry by threatening to oversupply the market. The threat is credible if the future discount rate is low enough and if enough small players enter the market in the absence of punishment. Financial institutions can capture vulnerable markets for profit, reducing competition, efficiency and equity.
Keywords: Deterrent Monopoly, Competition, Endogenous Market Structure,
JEL Classification: D40, D50, G34, G38, L11
Suggested Citation: Suggested Citation