DP4733 Balance of Power

Author(s): Jan Boone
Publication Date: November 2004
Keyword(s): contestable market, folk theorem, pricing games, refinement of predicted outcomes, supergames
JEL(s): C72, D43, L41
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=4733

This Paper argues that the efficiency distribution of players in a game determines how aggressively these players interact. We formalize the idea of balance of power: players fight very inefficient players but play softly versus equally (or more) efficient players. This theory of conduct predicts that entry by new firms leads to a less aggressive outcome if it creates a balance of power. A balance of power is created if more players get technologies that are close to the most efficient technology. Using a related argument, we show that an increase in entry costs can lead to more aggressive outcomes.