Abstract
This paper reconsiders Selten's famous ‘chain store paradox’ and its solution by Kreps and Wilson, which is based on entrants' uncertainty concerning the incumbent monopolist's predisposition to fight entry. Following Milgrom and Roberts, we interpret the predisposition to fight entry as the result of a rationally chosen commitment. However, commitment is imperfectly observable. Other assumptions are maintained. We show that a rational monopolist never fights entry, even if he may commit himself to an aggressive course of action. Entry occurs in all markets and is never fought. Hence, Selten's chain store paradox comes back in full force.
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In the framework of Bagwell's model, Van Damme and Hurkens 1997 have developed an equilibrium selection principle that actually favours that particular mixed strategy equilibrium that preserves the value of commitment.
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Adolph, B., Wolfstetter, E. Reputation and Imperfectly Observable Commitment: The Chain Store Paradox Revisited. De Economist 151, 357–368 (2003). https://doi.org/10.1023/B:ECOT.0000006593.65949.ce
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DOI: https://doi.org/10.1023/B:ECOT.0000006593.65949.ce