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

Preface
xi
dogenous entry always take those strategic decisions that induce them to be
aggressive in the market. Then, I apply these results to specific decisions of a
leader: 1) investments in cost reductions; 2) persuasive advertising (and other
demand enhancing investments); 3) decisions on the financial structure and
the optimal equity-debt ratio; 4) preliminary production levels in the presence
of network externalities and two-sided markets; 5) bundling of goods; 6) price
discrimination; 7) delegation of pricing decisions to downstream distributors
for interbrand competition; and 8) horizontal mergers.
In Chapter 3, I generalize the analysis of the forms of competition in
which a leader has a first mover advantage and followers decide their strategies
independently in a subsequent stage. I characterize the Stackelberg equilibrium
and the Stackelberg equilibrium with endogenous entry within the
general framework and for alternative forms of competition in quantities and
in prices. In particular, I derive the general principle for which market leaders
facing endogenous entry are always aggressive under both strategic complementarity
and strategic substitutability: they produce more than the rivals
when competing in quantities and they set lower prices when competing in
prices. I also derive the conditions under which a market leader is so aggressive
to adopt an entry-deterring strategy. This happens under constant
or decreasing marginal costs of production and homogenous goods, independently
from the size of the fixed costs of production and of the shape of the
demand function, and it provides a game theoretic foundation for some of the
insights of the limit-pricing framework associated with Joe Bain, Paolo Sylos
Labini and Franco Modigliani and of the contestability approach associated
with William Baumol, John Panzar and Robert Willig. The latter approach
could be re-interpreted in terms of Stackelberg competition in prices with
endogenous entry and homogenous goods, but our framework allows us to
extend its spirit to the more general case of product differentiation. In such a
case (as when marginal costs are increasing), market leaders prefer to allow
entry while still adopting aggressive strategies under both quantity and price
competition. Finally, I show that, when entry is endogenous, the allocation
of resources is improved by the presence of the leader. The spirit of these
results extends to the more complex cases with asymmetries between firms,
multiple leaders or endogenous leadership, and to the case of multiple strategic
variables. In conclusion, I illustrate how one can apply these results to
differentpolicyquestions:1)Ireconsider the role of a collusive cartel in the
presence of endogenous entry, and argue that this is ineffective unless it has
a leadership role (in which case the cartel coordinates aggressive strategies
between its members); 2) I review the problem of the optimal state aids and
trade policy for firms exporting in a foreign country, and I show that the
traditional results break down when the domestic firms are engaged in competition
in a market where entry is endogenous (in such a realistic case, state
aids inducing aggressive export strategies, and in particular export subsidies,