Paolo Sylos Labini Vindicated

In the first part of our chapter we critically discuss i) Modigliani’s 1958 interpretation of Sylos Labini’s Oligopolio e Progresso Tecnico (1957), ii) the following debate concerning the Sylos Postulate −the assumption according to which “potential entrants behave as though they expected existing firms to adopt the policy most unfavourable to them, namely, the policy of maintaining output while reducing the price (or accepting reductions) to the extent required to enforce such an output policy” − and iii) the incumbent’s choice of productive capacity to install as strategic entry deterrence. In the second part of the chapter we develop a model in which, as in Dixit (1980), there are three stages: in the first stage the incumbent(s) choose(s) the productive capacity to install; in the second stage a potential entrant chooses whether to enter or not and, in the case of entry, chooses the level of its productive capacity; in the third and final stage incumbent(s) and the entrant (if any) compete on prices (a la Bertrand). In particular, we study the role of mixed strategies in equilibrium. Hopefully, our model should ‘vindicate’ Sylos Labini’s theory of oligopoly and set it free from the Procrustean bed of Cournot competition.