Reputation and Imperfectly Observable Commitment: The Chain Store Paradox Revisited

12 Pages Posted: 20 May 2012 Last revised: 30 Jan 2014

See all articles by Brigitte Adolph

Brigitte Adolph

Humboldt University of Berlin - Faculty of Economics

Elmar Wolfstetter

Humboldt University of Berlin - Faculty of Economics; Korea University - College of Economics and Commerce; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: October 1, 1996

Abstract

In their seminal solution of the chain store paradox Kreps and Wilson assumed that the incumbent monopolist is predisposed, with a small probability, to ght entry. Milgrom and Roberts suggested to view this predisposition to ght as a result of precommitment to an aggressive course of action. However, they did not examine whether such an ability to make commitments is actually chosen by a rational incumbent monopolist. The present paper fills this gap. We assume that the monopolist has access to an appropriate commitment mechanism, with a small probability. Due to the possibility of misunderstanding or communication error, commitments are not perfectly observable. Otherwise, the assumptions of Kreps and Wilson are maintained. These plausible modifications have drastic implications: Precommitment becomes useless, and reputation effects break down; Selten's chain store paradox comes back in full force.

JEL Classification: D43, D82, D72

Suggested Citation

Adolph, Brigitte and Wolfstetter, Elmar G., Reputation and Imperfectly Observable Commitment: The Chain Store Paradox Revisited (October 1, 1996). Available at SSRN: https://ssrn.com/abstract=2171 or http://dx.doi.org/10.2139/ssrn.2171

Brigitte Adolph (Contact Author)

Humboldt University of Berlin - Faculty of Economics ( email )

Spandauer Strasse 1
Berlin
Germany
+49 30 2093 5652 (Phone)
+49 30 2093 5619 (Fax)

Elmar G. Wolfstetter

Humboldt University of Berlin - Faculty of Economics ( email )

Institut für Wirtschaftstheorie I
Spandauer Strasse 1
Berlin
Germany
+49 30 2093 5652/3 (Phone)
+49 30 2093 5619 (Fax)

HOME PAGE: http://www2.hu-berlin.de/wt1wo/staff/wolfstetter/index.html

Korea University - College of Economics and Commerce ( email )

Anam-dong, Sungbuk-Ku
Seoul, 136-701
Korea

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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