Balance of Power

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Abstract

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.
Original languageEnglish
Place of PublicationTilburg
PublisherMacroeconomics
Number of pages34
Volume2004-104
Publication statusPublished - 2004

Publication series

NameCentER Discussion Paper
Volume2004-104

Keywords

  • pricing games
  • Folk theorem
  • refinement of predicted outcomes
  • supergames
  • contestable market

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  • Cite this

    Boone, J. (2004). Balance of Power. (CentER Discussion Paper; Vol. 2004-104). Macroeconomics.