Contestability and the Significance of the Entrant’s Home Market∗

We use laboratory experiments to evaluate how contestability fares in a situation where the entrant and the incumbent have their own home markets and opportunities to enter each other’s markets. The disciplining effect in contestable markets depends crucially on hit-and-run entry. If both the entrant and the incumbent firm have their own home markets then the entrant might not like to hit-and-run. Although an entrant can still “hit ” in the incumbent’s market it cannot quite “run ” since the incumbent can enter to “hit ” the entrant in its own market. Our results suggest that the contestability result depends crucially on the relative profits in the entrant’s home and entry markets. We find that if an entrant has its own monopoly market, the entrant and the incumbent tacitly cooperate to achieve profits close to the monopoly level in each market. In contrast, when an entrant is from a more competitive market it exerts considerable disciplining force on the incumbent in the monopoly market