Entry Threat and Supra-competitive Pricing in Homogeneous-Goods Markets

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Abstract
We study a homogeneous-goods market with two identical incumbent suppliers, a potential entrant, and multiple downstream retailers. A market price is supra-competitive if it exceeds the incumbents' competitive equilibrium price in the absence of entry. We show that supra-competitive market prices arise only in exclusionary equilibria, in which the incumbents use transfers to retailers to prevent accommodation of entry. Exclusion can occur even when the entrant is highly efficient or transfers are small. These qualitative results extend to an asymmetric-information setting in which the entrant's unit cost is privately known.

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