Judo Economics
WORKING PAPER SERIES
Judo Economics in Markets with Asymmetric Firms
Daniel Cracau
Working Paper No. 2/2013
Impressum (§ 5 TMG)
Herausgeber:
Otto-von-Guericke-Universität Magdeburg
Fakultät für Wirtschaftswissenschaft
Der Dekan
Verantwortlich für diese Ausgabe:
Daniel Cracau
Otto-von-Guericke-Universität Magdeburg
Fakultät für Wirtschaftswissenschaft
Postfach 4120
39016 Magdeburg
Germany
http://www.fww.ovgu.de/femm
Bezug über den Herausgeber
ISSN 1615-4274
Judo Economics in Markets with Asymmetric Firms
Daniel Cracau1a a University of Magdeburg, Faculty of Economics and Management
Abstract
I study a game with one market incumbent and a small entrant in a duopoly with perfectly substitutable products. Firms face a sequential Bertrand competition. Limiting the initial capacity (Judo economics) is a plausible entry strategy for the small firm. If we, however, introduce asymmetry in production cost or product quality, capacity limitation can become obsolete. I derive thresholds as regards the cost and quality differences for the entrant’s choice to voluntarily limit the production capacity in equilibrium. I study a market entry game with price competition and perfectly substitutable products.
Limiting the initial capacity (Judo economics) is a plausible entry strategy. I show that under asymmetry in production cost or product quality, capacity limitation can become obsolete.
Keywords: Sequential Bertrand Competition, Judo Economics,
Asymmetric Firms, Cost, Quality
JEL: D43, L11
1. Introduction
Judo economics as an entry strategy was first introduced in Gelman and
Salop (1983). They show that a market entrant can use a capacity limitation to successfully survive in a Bertrand competition with homogeneous goods.
For the market incumbent, accommodating entry turns out to be the profit maximizing response towards a Judo entrant. Rather than cutting down prices for the whole market, the incumbent allows the new
Judo Economics in Markets with Asymmetric Firms
Daniel Cracau
Working Paper No. 2/2013
Impressum (§ 5 TMG)
Herausgeber:
Otto-von-Guericke-Universität Magdeburg
Fakultät für Wirtschaftswissenschaft
Der Dekan
Verantwortlich für diese Ausgabe:
Daniel Cracau
Otto-von-Guericke-Universität Magdeburg
Fakultät für Wirtschaftswissenschaft
Postfach 4120
39016 Magdeburg
Germany
http://www.fww.ovgu.de/femm
Bezug über den Herausgeber
ISSN 1615-4274
Judo Economics in Markets with Asymmetric Firms
Daniel Cracau1a a University of Magdeburg, Faculty of Economics and Management
Abstract
I study a game with one market incumbent and a small entrant in a duopoly with perfectly substitutable products. Firms face a sequential Bertrand competition. Limiting the initial capacity (Judo economics) is a plausible entry strategy for the small firm. If we, however, introduce asymmetry in production cost or product quality, capacity limitation can become obsolete. I derive thresholds as regards the cost and quality differences for the entrant’s choice to voluntarily limit the production capacity in equilibrium. I study a market entry game with price competition and perfectly substitutable products.
Limiting the initial capacity (Judo economics) is a plausible entry strategy. I show that under asymmetry in production cost or product quality, capacity limitation can become obsolete.
Keywords: Sequential Bertrand Competition, Judo Economics,
Asymmetric Firms, Cost, Quality
JEL: D43, L11
1. Introduction
Judo economics as an entry strategy was first introduced in Gelman and
Salop (1983). They show that a market entrant can use a capacity limitation to successfully survive in a Bertrand competition with homogeneous goods.
For the market incumbent, accommodating entry turns out to be the profit maximizing response towards a Judo entrant. Rather than cutting down prices for the whole market, the incumbent allows the new
References: Allen, B., Deneckere, R., Faith, T., Kovenock, D., 2000. Capacity precommitment as a barrier to entry: a bertrand-edgeworth approach. Economic Theory 15, 501–530. Boccard, N., Wauthy, X., 2009. Entry accommodation under multiple commitment strategies : judo economics revisited. CORE Discussion Papers 2009050, Universit´ catholique de Louvain, Center for Operations Research Cracau, D., Sadrieh, A., 2013. Coexistence of small and dominant firms in bertrand competition: judo economics in the lab Furth, D., Kovenock, D., 1993. Price leadership in a duopoly with capacity constraints and product differentiation Milgrom, P., Roberts, J., 1982. Limit pricing and entry under incomplete information: an equilibrium analysis Motta, M., 1993. Endogenous quality choice: price vs. quantity competition. Sørgard, L., 1995. Judo economics reconsidered: capacity limitation, entry and collusion Thomas, L. A., 1999. Incumbent firms’ response to entry: price, advertising, and new product introduction