SFB 303 Discussion Paper No. A - 264
Author: Bös, Dieter, and Lorenz Nett
Title: Privatization, Price Regulation, and Market Entry - An Asymmetric
Multistage Duopoly Model
Abstract: This paper deals with a privatized firm facing potential market entry.
The firm has inherited excess capacity from its public past. The players
have asymmetric costs. Only the entrant must install new capacity, which
incurs positive capacity installation costs. The paper considers the subgame
perfect equilibria in a four-stage game with perfect foresight. The
incumbent and the entrant first decide on the capacities and subsequently
on the prices. In both cases the incumbent moves first. The second main part
of the paper deals with price-cap constraint on the incumbent. The paper
shows that a binding price constraint does not necessarily lead to an
increase in capacity and output (capacity trap). If the price constraint is
binding and market entry occurs, the entrant sells at a higher price than
the incumbent.
Keywords:
JEL-Classification-Number: 610, 619
Creation-Date: December 1989
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