Lecture 9

Lecture 9 - Today What if you can't deter entry Network...

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5/2/2007 1 Today • What if you can’t deter entry? • Network Externalities 5/2/2007 Network Externalities Entry Accommodation - I • Unfortunately, in some cases entry cannot be deterred profitably. 5/2/2007 Recall our original game where building excess capacity was able to deter entry. Original Game Potentia Enter You Fight Accommodate (-10,30) 5/2/2007 Potential Entrant Don’t Enter (0,100) (30,50)
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5/2/2007 2 Entry is Deterred with Capacity Investment Potentia Enter You Fight Accommodate (-10,30) 5/2/2007 Potential Entrant Don’t Enter (0,70) (30,20) Entry Accommodation - II But what if the game looked like EA1 instead? In this case, regardless of what you commit to, you simply cannot drive the entrant’s profits to 5/2/2007 zero. Hence, you will not be able to deter entry. In this specific case, you wouldn’t want to build the extra capacity. Example EA1 Potentia Enter Fight Accommodate ( 10 ,30) 5/2/2007 Potential Entrant Don’t Enter (0,100) (30,50)
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5/2/2007 3 Entry Accommodation - III What about EA2? In this example, the excess capacity needed to drive the potential entrants profits less than zero is 5/2/2007 60K rather than 30K. This would keep the entrant out, but would you want to build the excess capacity in this case? Example EA2 – after 60K capital investment Potentia Enter You Fight Accommodate (-10, 0 ) 5/2/2007 Potential Entrant Don’t Enter (0, 40 ) (30,- 10 )
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This note was uploaded on 09/03/2009 for the course ECON 106E taught by Professor Ackerberg during the Spring '08 term at UCLA.

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Lecture 9 - Today What if you can't deter entry Network...

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