Coexistence of Small and Dominant Firms in Bertrand Competition: Judo Economics in the Lab

Judo economics describes an entry strategy for small firms. Using a capacity limitation, they force dominant market incumbents to accommodate. We study the power of judo economics in different market environments. We find experimental evidence supporting the theory in the original setting with a monopolistic, dominant market incumbent. When we introduce a cost advantage for small firms, profits go down. This can be explained by incumbents responding aggressively towards large entrants. For settings with multiple market incumbents, the results are reversed. There, a cost advantage strengthens small firms, and pricing below the incumbents' marginal cost provides the unique entry strategy.