Detecting Strategic Entry Deterrence Empirically: Non-monotonicity Tests

Abstract

Incumbent firms in a market can take action to make entry to the market unprofitable for potential entrants. When this is done from an incentive of actively keeping the entrants at bay and maintaining monopoly position, it is referred to as strategic entry deterrence. Exploiting strategic entry deterrence is in the interest of antitrust authorities, for its adverse effects on the competitive market equilibrium and welfare. In this literature review I am going to review the relevant findings of entry deterrence and attempt to answer to question of how to detect entry deterrence empirically. I will cover a possibly more systematic way of concluding empirical results: non-monotonicity tests. Non-monotonicity tests, a concept introduced by Ellison and Ellison (2011), aims to find differences in the incumbent’s behavior when the incumbent’s entry deterring incentives are absent or present. It is argued that these incentives are highest when the incumbent’s action has a pivotal effect on the entry decision, more specifically at markets of intermediate entry probability. After presenting the theory behind non-monotonicity tests, I will review three empirical papers, which all find some evidence of strategic entry deterrence in the markets of intermediate entry probability.