Trigger-Point Mechanism and Conditional Commitment: Implications for Entry, Collusion, and Welfare

14 Pages Posted: 9 Mar 2007  

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

Abstract

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.

Suggested Citation

Qiu, Larry D. and Cheng, Leonard K.H. and Fung, Michael K., Trigger-Point Mechanism and Conditional Commitment: Implications for Entry, Collusion, and Welfare. Contemporary Economic Policy, Vol. 25, No. 2, pp. 156-169, April 2007. Available at SSRN: https://ssrn.com/abstract=969098 or http://dx.doi.org/10.1111/j.1465-7287.2006.00028.x

Larry Dongxiao Qiu (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

School of Economics and Finance
University of Hong Kong
Pokfulam
Hong Kong

HOME PAGE: http://www.bm.ust.hk/~larryqiu/

Leonard K.H. Cheng

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China

Michael K. Fung

Hong Kong Polytechnic University - School of Accounting & Finance ( email )

Hung Hom, Kowloon
Hong Kong

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