Scandinavian Working Papers in Economics

Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

No 2008/27: Foreclosure in contests

Derek J. Clark (), Øystein Foros () and Jan Yngve Sand ()
Additional contact information
Derek J. Clark: Dept. of Economics and Management, University of Tromsø, Postal: University of Tromsø, Department of Economics and Management, N-9037 Tromsø, Norway
Øystein Foros: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway
Jan Yngve Sand: Dept. of Economics and Management, University of Tromsø, Postal: University of Tromsø, Department of Economics and Management, N-9037 Tromsø, Norway

Abstract: We consider a contest in which one firm is a favourite as it initially has a cost advantage over rivals. Instead of taking the set of rivals as given, we consider the possibility that the favourite transfers the source of its advantage wholly or partially to a subset of rival firms. The result of this may be foreclosure of those firms that do not receive the cost reduction. We present conditions under which this transfer will be expected to occur, and show that the dominant firm will prefer to grant some rivals the maximum cost reduction even if a partial transfer can be made. Furthermore we consider the welfare properties of excluding some rivals. Applications include lobbying, patent races and access to essential infrastructure.

Keywords: Foreclosure; contest

JEL-codes: D21; L24

20 pages, February 10, 2009

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