Coexistence of small and dominant firms in Bertrand competition: Judo economics in the lab

Posted by D. Daniel Sokol

Abdolkarim Sadrieh (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg) and Daniel Cracau (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg) experiment with Coexistence of small and dominant firms in Bertrand competition: Judo economics in the lab

ABSTRACT: The theory of “Judo Economics” describes an optimal entry strategy for small firms. Using a capacity limitation, small firms force dominant market incumbents to accommodate. In this article, we study the power of Judo economics as an entry strategy in different market environments. We find experimental evidence supporting the theory in the original setting with a monopolistic, dominant market incumbent. When we introduce a cost advantage for small firms, profits go down. This can be explained by incumbents responding aggressive towards large entrants. For settings with multiple market incumbents, results are reversed. There, a cost advantage strengthens small firms and pricing below the incumbents’ marginal cost provides the unique entry strategy.