Working Paper: CEPR ID: DP4733
Authors: Jan Boone
Abstract: This Paper argues that the efficiency distribution of players in a game determines how aggressively these players interact. We formalize the idea of balance of power: players fight very inefficient players but play softly versus equally (or more) efficient players. This theory of conduct predicts that entry by new firms leads to a less aggressive outcome if it creates a balance of power. A balance of power is created if more players get technologies that are close to the most efficient technology. Using a related argument, we show that an increase in entry costs can lead to more aggressive outcomes.
Keywords: Contestable market; Folk theorem; Pricing games; Refinement of predicted outcomes; Supergames
JEL Codes: C72; D43; L41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| efficiency distribution of players (D39) | aggressive interactions (D74) |
| entry of new firms (L26) | aggressive interactions (D74) |
| increase in entry costs (L11) | aggressive outcomes (D74) |