On Entry Preventing Behavior and Limit Price Models of Entry

Abstract

Formally, the market is regarded as a supergame in which one established firm and one potential entrant are players. Both players know all relevant demand and cost functions, and throughout the paper, noncooperative behavior is assumed. The model has two distinct stages: pre- and post entry. In the pre-entry stage, the monopolist chooses his price and capital stock so as to maximize his discounted profits, noting that his investment decision may affect the entry plans of the entrant. Existence of equilibrium is proved, entry preventing behavior is characterized and conditions are shown under which it will be employed.

I am grateful to Professor Vernon Smith for the opportunity to present an earlier version of this work at the Arizona Conference on Experimental Economics in March, 1977, and to Mordecai Kurz for a suggestion leading to an improvement in exposition and in the proof of theorem 1. I retain responsibility for any remaining errors.