Rupayan Pal and Vinay Ramani
This paper analyzes optimal strategies of an incumbent intermediary, who matches agents on the two sides of a market, in the presence of entry threat under alternative scenarios. It shows that, when entry is free, strategic entry accommodation is the optimal choice of the incumbent—not entry deterrence, unless the variation in agents’ types is small. Entry accommodation remains optimal for the incumbent for a wide range of parametric configurations even when there is a fixed cost of entry. These results are in sharp contrast to the predictions of existing models of entry.