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Entry Mistakes with Strategic Pricing
D82 - Asymmetric and Private Information
L11 - Production, Pricing, and Market Structure; Size Distribution of Firms
L13 - Oligopoly and Other Imperfect Markets
This paper concerns entry mistakes when the incumbent practices strategic pricing. It is shown that an entry mistake may be a Pareto outcome. Due to an agency problem between the owner and the manager of the entrant firm there may be pooling sequential equilibria with too much entry that are preferred by both the entrant and the incumbent. This result is surprising because it would be expected that the entrant would prefer to know the type of incumbent in the industry before he takes his decision.