Competition, Innovation, and Antitrust. A Theory of Market ... - Intertic

Preface
ix
be exploited by potential entrants. A simple situation in which this occurs is
when entry is simply free. A more general situation emerges when firms or
entrepreneurs are active in different markets and the rate of profit mustbe
equalized across these markets. Another and more realistic situation in which
entry can be regarded as endogenous is when there are large fixed costs of
entry or limited sunk costs (traditionally considered barriers to entry) that
constrain endogenously the entry decision of the firms. Overall, we do believe
that endogenous entry should be regarded as the standard situation
in most markets, while exogenous entry only emerges in extreme situations
where entry is not a decision taken by the firms, but it is determined by other
institutional or regulatory authorities.
When entry is endogenous market leaders are always aggressive under
both strategic substitutability and complementarity, under both competition
in quantities and in prices, and even under other forms of competition. This
has radical implications for the pricing strategies, for the choice of strategic
investments in cost reductions, quality improvements and advertising, for
the choice of the financial structure, for the decisions to bundle goods or
price discriminate, for the production decisions in the presence of network
externalities, two-sided markets and learning by doing, for the adoption of
vertical restraints, for the decision to merger or collude with a rival, and for
many other important issues in industrial organization.
Evidently, the endogenous entry approach has crucial consequences on
concrete antitrust policy for the analysis of the behavior of market leaders
and also for merger and collusion issues. When entry is endogenous, incumbents
are always aggressive, typically without exclusionary purposes, and
their strategies hardly harm consumers; mergers in markets where entry is
endogenous take place if and only if they create enough cost efficiencies; and
cartels between a limited number of firms facing endogenous entry are ineffective.
The flavor of these results goes back to the Chicago view, but our
game theoretic analysis is derived from the standard post-Chicago approach,
which is augmented with endogenous entry.
The literature on industrial organization is quite fragmented because separate
analysis is usually undertaken for models of competition in quantities,
models of competition in prices and models of competition for the market.
A possible advantage of the approach I adopt in this book is the provision
of a unified framework for the analysis of market structures. This framework
encompasses most models of competition in quantities, prices and models of
competition for the market, and can be used to analyze and compare different
market structures in a simpler manner. The book contains a large amount
of unpublished material, especially in the theoretical analysis of Chapters 2
to 4. The applied analysis in Chapters 5 to 7 is based on policy oriented
work, some of which was realized as the chief economist of the Task Force
on Competition established by the International Chamber of Commerce of
Paris in 2006.