Judo Economics1.pdf

Judo Economics: Capacity Limitation and Coupon Competition Judith R. Gelman, FTC Steven C. Salop, Georgetown University Law Center Section 1: Introduction ? A two-Player Game ? Players: the incumbent (a domionant firm) v.s. the entrant (a fringe competitor). ? Judo Economics Definition: A small firm adopts the above-mentioned strategies and uses its rivals large size into its own advantage. Justification: These strategies credibly reduce the threat posed to the dominant firm and makes retaliation more expensive. The rational incumbent is thus induced to accommodate the entrant. General Framework ? Introduction ? Main Body (Model-Setting) 1) Capacity and Competition (a simple capacity-limitation model ): follwing Schelling (1960), when the entrant judiciously limits its capacity, it is in the incumbents interest to accommodate entry. 2) Coupon Competition (a more sophisticated entry strategy ): a) when the entrant both limits its capacity and sets a low price; b) the entrant can increase profits by selling coupons; c) if these coupons are transferable. Section 2: Capacity and Competition Case Buliding ? First Stage 1) Consumer demand: D(p) 2) Market: MC=c1 P=p1m ? Second Stage 1) a single potential entrant k units MC=c2 2) the entrant has no cost advantage(c2≥c1) 3) nominal sunk cost which is invariant with respect to k ? Focus the effect of the entrants ability to limit capacity on post-entry pricing ? Three Assumptions 1) Consumers prefer the incumbents brand at equal prices. 2) Consumers prefer the less expensive brand with price differences. 3) The entrant plays first (leader), irrevocably choosing a price/capacity pair (p2, k); the incumbent (follower) reacts by choosing a price p1 Section 2.1: Competition with Unlimited Capacity ? Suppososition the entrants capac