Perfection and entry: an example

by Jonathan Cave


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This paper, in the context of a simplified example, shows that circumstances exist under which an incumbent firm can deter a potential entrant even where there is room for both firms in the industry, but that such deterrence may or may not form part of a perfect equilibrium. This example uses the discounted supergame structure, and the perfectness concept being used is that of subgame perfection. At the end of the discussion the author briefly describes the impact of another perfectness notion. The example is also of some historical significance as a counterexample to the conjecture that the requirement of perfectness does not reduce the set of equilibrium outcomes in the discounted game.

This report is part of the RAND Corporation Paper series. The paper was a product of the RAND Corporation from 1948 to 2003 that captured speeches, memorials, and derivative research, usually prepared on authors' own time and meant to be the scholarly or scientific contribution of individual authors to their professional fields. Papers were less formal than reports and did not require rigorous peer review.

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