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Deterring Entry through High Wages

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Abstract

This paper shows that incumbent firms could use wage rates to deter entry of new firms. Two cases are analyzed. In the first, incumbents determine wages of all firms producing the same good (an extreme case of a wage bargaining at the industry-level -a kind of bargaining which is prevalent in many European countries-). In the second, each firm can choose different wages, knowing that the efficiency of workers depends on their wage relative to a wage that they consider fair. In both cases, there are circumstances in which incumbents choose high wages in order to deter entry.

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