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Judo Economics in Markets with Asymmetric Firms

By  |  June 7, 2013

Posted by D. Daniel Sokol

Daniel Cracau (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg) describes Judo Economics in Markets with Asymmetric Firms

ABSTRACT: I study a game with one market incumbent and a small entrant in a duopoly with perfectly substitutable products. Firms face a sequential Bertrand competition. Limiting the initial capacity (Judo economics) is a plausible entry strategy for the small firm. If we, however, introduce asymmetry in production cost or product quality, capacity limitation can become obsolete. I derive thresholds as regards the cost and quality differences for the entrant’s choice to voluntarily limit the production capacity in equilibrium. I study a market entry game with price competition and perfectly substitutable products. Limiting the initial capacity (Judo economics) is a plausible entry strategy. I show that under asymmetry in production cost or product quality, capacity limitation can become obsolete.