Discussion paper

DP4733 Balance of Power

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.

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Citation

Boone, J (2004), ‘DP4733 Balance of Power‘, CEPR Discussion Paper No. 4733. CEPR Press, Paris & London. https://cepr.org/publications/dp4733