Corruption, Market Quality and Entry Deterrence in Emerging Economies

In many emerging economies corruption, poor quality of information and poor governance lead to restricted entry. In this paper we analyze the determinants of the .height.of entry barrier in a developing economy where established .rms often use dubious means to deter entry of other .rms. We analyse this scenario in a three-stage game of entry deterrence. The incumbent has incomplete information about the entrant.s costs but can increase this cost by resorting to unfair means (for example, bribing a politician who harms the entrant). Higher is the bribe, higher will be the entry cost and hence lower will be the incentive to enter. In our set-up bribe serves as a proxy for .height.of entry barrier. The entrant observes its cost and decides whether or not to enter. We completely characterise the optimal bribe and show that this depends on the market size, the .di¤erentiation.parameter (whether goods are substitutes or complement) and the extent of uncertainty. Uncertainty seems to increase bribe and decrease market quality. We also show that zero bribe need not maximise total surplus and market quality. Our results seem to be compatible with anecdotal evidences from an emerging economy like India.

Published: Dastidar, Krishnendu Ghosh, and Makoto Yano, 2021. "Corruption, market quality and entry deterrence in emerging economies," International Journal of Economic Theory, Vol. 17(1), pp. 101-117.
https://onlinelibrary.wiley.com/doi/full/10.1111/ijet.12265