Imperfect Competition and Committment

Abstract

The degree of competition that a rm faces affects its ability to commit to good behavior. However, the relationship need not be monotonic since competition affects the pro ts when committed to good behavior (such as efficient high quality) and bad behavior as well as the short-term profits from "cheating". We demonstrate that as a result competition (using two different measures of competition which show qualitatively similar effects) might have non-monotonic effects on a rm s ability to commit. In particular, a firm might choose to operate in a more competitive environment.