Oligopoly dynamics with barriers to entry
AbstractThis paper considers the effects of raising the cost of entry for potential competitors on infinite-horizon Markov- perfect industry dynamics with ongoing demand uncertainty. All entrants serving the model industry incur sunk costs, and exit avoids future fixed costs. We focus on the unique equilibrium with last- in first-out expectations: a firm never exits before a younger rival does. When an industry can support at most two firms, we prove that raising barriers to a second producer’s entry increases the probability that some firm will serve the industry and decreases its long-run entry and exit rates. In numerical examples with more than two firms, imposing a barrier to entry stabilizes industry structure.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-06-29.
Date of creation: 2006
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-01-02 (All new papers)
- NEP-BEC-2007-01-02 (Business Economics)
- NEP-COM-2007-01-02 (Industrial Competition)
- NEP-CSE-2007-01-02 (Economics of Strategic Management)
- NEP-ENT-2007-01-02 (Entrepreneurship)
- NEP-IND-2007-01-02 (Industrial Organization)
- NEP-MIC-2007-01-02 (Microeconomics)
- NEP-TID-2007-01-02 (Technology & Industrial Dynamics)
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