Weak entrants are welcome

This paper investigates the decision problem of an incumbent firm confronte d by both a weak and strong entrant in a differentiated market. Suppose tha t the incumbent can deter entry of the weak firm, but cannot deter entry of the strong firm by itself. Then the incumbent may allow entry of the weak firm and use it to alter the strong firm's entry decision. The present pape r formalizes this idea, and it sheds new light on the fact that domestic fi rms are sometimes able to block strong foreign firms after trade liberaliza tion. The idea also explains why a dominant firm lets fringe firms be in th e market. (C) 2000 Elsevier Science B.V. All rights reserved.