A sequential equilibrium model of private antitrust enforcement is presented. Consumers have incomplete information about cartel costs and cannot accurately estimate a priori the damage recovery from an antitrust action. Consumers are able to infer cartel costs from the equilibrium pricing strategy of firms. The universal divinity criterion is used to characterize the sequential equilibrium. It is shown that for a sufficiently large damage multiple, antitrust enforcement effectively increases social welfare.

In his comment, Stanley Reynolds provides a very interesting application of subgame perfect equilibrium concept to my 1981 model.' Reynolds claims that contrary to my analysis, the Sylos Postulate and excess capital investment need not be inconsistent with Nash equilibrium (p. 896). It is not overly surprising if characteristics of equilibrium are altered by applying a different solution concept. However, conclusions arrived at in my earlier paper regarding Sylos Postulate and Excess Capacity Hypothesis are quite robust to changes in equilibrium. Reynold's assertion that behavior of incumbent at subgame perfect equilibrium is consistent with Sylos Postulate or Excess Capacity Hypothesis is based on a misunderstanding of these concepts. As Reynolds notes, two-period, openloop Nash equilibrium with capacity as an upper bound on output, which was examined in my earlier paper, is also a subgame perfect equilibrium. Thus, all of results for this case still hold. In particular, monopolist will deter only if capacity level without threat of exceeds entry-deterring level. This requires capacity to be relatively inexpensive as compared to discounted marginal profit evaluated at blocking output (Proposition 1 and equation (4) of my paper). Thus, the Sylos Postulate is only satisfied in this limited sense (p. 506). The established firm may choose, however, to permit entry. When occurs, established firm always operates at full capacity before entry, thus contradicting Excess Capacity Hypothesis. When capacity is relatively inexpensive, established firm lowers its output to accommodate entrant and holds excess capacity after entry, thus contradicting Sylos Postulate. For case where capacity investment affects production costs, entrant and incumbent firm behavior at subgame perfect equilibrium reinforces my conclusion that the Sylos Postulate ignores both strategic interaction between firms and dynamic aspects of entry (p. 503). The established firm at subgame perfect equilibrium will not deter whether or not it is profitable to do so. Rather, will be deterred only if

Two crucial assumptions frequently made in industrial organization are that an established firm deters entry either by a constant high output (the Sylos Postulate) or by high excess capacity (the Excess Capacity Hypothesis). These assumptions may be an accurate description of the observed conduct of firms in some industries. However, when the rules of the post-entry game are clearly specified, the optimal output and investment strategies of an established firm may depart considerably from these behavioral assumptions. Because of this possible inconsistency with rational behavior, any conclusions about the formation of industry based upon either assumption are highly suspect. What is more, these assumptions avoid the main issue of whether entry deterrence is worthwhile at all. This paper presents a dynamic model of entry in which established firms pursue a Cournot Nash (alternatively Stackelberg) strategy toward a potential entrant. The entrant behaves in Cournot-Nash fashion and chooses output on the basis of expected postentry profits at the equilibrium of the post-entry game. Within this framework, a constant output entry-deterring strategy would involve maintenance of an entry-deterring output level before and after entry is threatened. An excess capacity entry-deterring strategy would involve holding excess capacity at an entry-deterring level and increasing output to that level after entry is threatened. Special conditions are presented under which the Sylos Postulate or the Excess Capacity Hypothesis will accurately describe optimal entry-deterring strategies. In addition, special conditions are examined under which the established firm maintains a constant output or holds pre-entry excess capacity when large-scale entry does in fact take place. The analysis shows that in general, established firm reactions to entry are quite different from these special cases. The Sylos Postulate (see Joseph Bain; Paolo Sylos-Labini; Franco Modigliani, 1958) asserts not only that potential entrants expect established firms to maintain their output constant as entry occurs, but that established firms keep output constant at a level that deters entry whether or not it is profitable to do so. Hailed as a welcome major breakthrough on the oligopoly front (Modigliani, 1958) the Sylos Postulate underlies many papers in the large theoretical and empirical literature on limit pricing.' Yet the Sylos Postulate ignores both the strategic interaction between firms and the dynamic aspects of entry.2 Unless the established firm's monopoly output exceeds the entrydeterring level, the established firm with a general cost function able to choose an entry-deterring output level will instead always desire a lower output level before entry. For the special case where capacity is an upper bound on output and the established firm is a Stackelberg leader in the post-entry game,

Competition and intellectual property (IP) protections are complements in stimulating innovation. When IP is appropriable, a market for inventions forms and competitive pressures increase incentives to innovate. Competition among producers, the demand side of the market for inventions, and competition among inventors, the supply side of the market for inventions, create incentives to innovate. When IP is not fully appropriable, markets for inventions are limited and competitive pressures can decrease incentives to innovate. Firms vertically integrate R&D and production and share technology to appropriate the returns to IP. This implies that antitrust policy and IP protections are complements.

Market organization significantly affects total output and incentives for firms to invest. I compare three types of market organization. In a market with search and random matching, total output is excessive and there are incentives for inefficient underinvestment. In a market with a monopoly dealer, total output is insufficient and underinvestment also occurs. Competition between the search market and the dealer market improves incentives to invest, and competition between dealers yields efficient total output and investment. This suggests that additional entry of wholesalers and other interbusiness dealers should stimulate aggregate business investment.

A model of endogenous price adjustment under money growth is presented. Firms follow (s,S) pricing policies, and price revisions are imperfectly synchronized. In the aggregate, price stickiness disappears, and money is neutral. The connection between firm price adjustment and relative price variability in the presence of monetary growth is also investigated. The results contrast with those obtained in models with exogenous fixed timing of price adjustment.