Abstract
In this paper, contestability theory is examined under conditions of asymmetric information. Signals of economic profitability to potential entrants are the incumbent's list price and accounting rate of return. A disequilibrium analysis indicates that, while potential entry imposes a price discipline, incumbents can earn profits, although not indefinitely under stable conditions. Also, there may be wasteful entry even into industries where prices approximate the optimum.
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I thank Marcel Boyer, Mukesh Eswaran, John Galbraith, Barry Ma, Barbara Spencer, Vicky Zinde-Walsh and an anonymous referee for helpful comments on an earlier draft. Research on this paper was supported by the FCAR and the SSHRCC.
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Cairns, R.D. Asymmetry of information and contestability theory. Rev Ind Organ 9, 99–107 (1994). https://doi.org/10.1007/BF01024222
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DOI: https://doi.org/10.1007/BF01024222