Working Paper: NBER ID: w20512
Authors: Martin C. Byford; Joshua S. Gans
Abstract: We provide a new model that generates persistent performance differences amongst seemingly similar enterprises. Our model provides a mechanism whereby efficient incumbent rivals can give permission for an inefficient firm to exist in the presence of efficient entrants. We demonstrate that, in a repeated game, an efficient incumbent has a unilateral incentive to establish a relational contract that softens price competition to either strengthen the inefficient firm in a war of attrition that emerges post-entry or reduce the value to the inefficient firm of selling its position to entrants. The paper provides conditions under which that equilibrium exists and derives a number of empirical predictions as implications of the model. It is demonstrated that performance differences are likely to be associated with stability in the identity of firms in the market.
Keywords: No keywords provided
JEL Codes: L11; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Efficient incumbents' pricing strategy (D43) | Profitability of inefficient firms (D22) |
| Efficient incumbents establish relational contracts (L14) | Softening of price competition (D43) |
| Softening of price competition (D43) | Survival of inefficient firms (D22) |
| Efficient entrants (D26) | Dynamics of market entry and competition (L13) |