Abstract
The rationality of predatory practices has been extensively debated among economists and lawyers. Selten (1978) considered a fictitious chain-store confronted with potential entrances of local competitors. In his formal analysis via an extensive game with complete and perfect information predatory behavior is precluded by the unique sequential (and perfect) equilibrium. Kreps and Wilson (1982b) and Milgrom and Roberts (1982) established in modified models with incomplete information that predation against early entrants may be rational since it creates a reputation to the effect that later potential entrants are deterred. The present paper offers a modification of Selten's model with complete but imperfect information which renders possible reputation and deterrence.
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Trockel, W. The chain-store paradox revisited. Theor Decis 21, 163–179 (1986). https://doi.org/10.1007/BF00127193
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DOI: https://doi.org/10.1007/BF00127193