Exit Deterrence

Martin Byford, RMIT University
Joshua S. Gans, University of Toronto

Abstract

This paper is the first to provide a general context whereby potential entry can lead incumbent firms to permanently reduce the intensity of competition in a market. All previous results found that potential entry would lead to lower prices and greater competition. Examining markets where entry occurs by the acquisition of access rights from an existing incumbent, we demonstrate that, where competitive choices are strategic complements, a more efficient entrant may be unable to acquire those rights from a less efficient incumbent due to the unilateral accommodating behaviour of the efficient incumbent. Similarly, such accommodating behaviour may deter efficient investment by an incumbent. These results have implications as to how economists view potential entry and its benefits.