Strengthening a Weak Rival for a Fight

20 Pages Posted: 14 Sep 2014 Last revised: 15 Oct 2018

See all articles by Martin C. Byford

Martin C. Byford

Royal Melbourne Institute of Technolog (RMIT University) - School of Economics, Finance and Marketing

Joshua S. Gans

University of Toronto - Rotman School of Management; NBER

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Date Written: October 15, 2018

Abstract

We provide a new model wherein firms of different productivities survive in an industry despite the threat of entry by high productivity firms. We demonstrate that an effi- cient incumbent has a unilateral incentive to establish a relational contract, softening price competition to strengthen its inefficient rival in a war of attrition that emerges post-entry, and raising the price of the inefficient firm in the acquisition market. We show that this equilibrium gives rise to persistent performance differences, market com- pression, and stability in the identity of firms in the market. Moreover, the relational contracting equilibrium is facilitated by strong anti-trust laws.

Keywords: persistent performance differences, potential entry, war of attrition, spatial competition

JEL Classification: L22, L11

Suggested Citation

Byford, Martin C. and Gans, Joshua S., Strengthening a Weak Rival for a Fight (October 15, 2018). Rotman School of Management Working Paper No. 2495431, Available at SSRN: https://ssrn.com/abstract=2495431 or http://dx.doi.org/10.2139/ssrn.2495431

Martin C. Byford

Royal Melbourne Institute of Technolog (RMIT University) - School of Economics, Finance and Marketing ( email )

440 Elizabeth Street
Melbourne, Victoria 3000
Australia

Joshua S. Gans (Contact Author)

University of Toronto - Rotman School of Management ( email )

Canada

HOME PAGE: http://www.joshuagans.com

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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