Trigger-point mechanism and conditional commitment : implications for entry, collusion, and welfare

Larry D. QIU, Leonard K. CHENG, Michael K. FUNG*

*Corresponding author for this work

Research output: Journal PublicationsJournal Article (refereed)

Abstract

When fixed, sunk investment costs are high, firms may not have sufficient incentive to enter the market unless future entry is constrained. In this case, the government faces a dilemma between a full commitment and noncommitment of restricted future entry. A way out is to consider a commitment conditional on the realization of the uncertain parameters, such as the trigger-point mechanism (TPM) that sets conditions on current production level, excess capacity, and demand growth under which future entry will be allowed. This article shows that the TPM facilitates the incumbents’ collusion but may improve social welfare under certain circumstances.
Original languageEnglish
Pages (from-to)156-169
Number of pages14
JournalContemporary Economic Policy
Volume25
Issue number2
Early online date24 Jan 2007
DOIs
Publication statusPublished - Apr 2007
Externally publishedYes

Bibliographical note

Financial support by a grant from the Research Grant Councilof Hong Kong (HKUST6211/97H).

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