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The Divergent Effects of Long-Term and Short-Term Entry Investments on Multimarket Cartels

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We study multimarket effects in a setting with home-market asymmetries. In our duopoly experiment each firm has a home market but may also enter the other firm's market. Without entry barriers, we observe a high level of mutual forbearance with firms serving home markets exclusively. With short-term entry barriers, the competition rates decrease significantly. Surprisingly, with long-term entry barriers, firms exhibit higher levels of competition, entering each other's market more often. We conjecture that in the latter case, bearing the cost of entry is perceived as a signal for intentions to compete, which has an adverse effect on cooperation. (JEL: D4, L1)
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Keywords: experimental economics; market entry barriers; mutual forbearance; prisoners' dilemma

Appeared or available online: February 1, 2019

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