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Entry, Exit, and Imperfect Competition in the Long Run

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Author Info
Rabah Amir (CORE)
Val E. Lambson (Brigham Young University, Provo)

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Abstract

An infinite-horizon, stochastic model of entry and exit with sunk costs and imperfect competition is constructed. Simple examples provide insights into: (1) the relationship between sunk costs and industry concentration, (2) entry when current profits are negative, and (3) the relationship between entry and the length of the product cycle. A subgame perfect Nash equilibrium for the general dynamic stochastic game is shown to exist as a limit of finite-horizon equilibria. This equilibrium has a relatively simple structure characterized by two numbers per finite history. Under very general conditions, it tends to exhibit excessive entry and insufficient exit relative to a social optimum.

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Publisher Info
Paper provided by University of Copenhagen. Department of Economics. Centre for Industrial Economics in its series CIE Discussion Papers with number 2003-03.

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Length: 31 pages
Date of creation: Sep 2003
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Handle: RePEc:kud:kuieci:2003-03

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Related research
Keywords: entry; exit; dynamic games; integer constraints;

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Find related papers by JEL classification:
C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Dewey, Donald, 1976. "Industrial Concentration and the Rate of Profit: Some Neglected Theory," Journal of Law & Economics, University of Chicago Press, vol. 19(1), pages 67-78, April.
  2. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-38, June. [Downloadable!] (restricted)
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  3. Fudenberg, Drew & Tirole, Jean, 1987. "Understanding Rent Dissipation: On the Use of Game Theory in Industrial Organization," American Economic Review, American Economic Association, vol. 77(2), pages 176-83, May. [Downloadable!] (restricted)
  4. Ericson, Richard & Pakes, Ariel, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Blackwell Publishing, vol. 62(1), pages 53-82, January. [Downloadable!] (restricted)
  5. Rabah Amir & Val E. Lambson, 1998. "On the Effects of Entry in Cournot Markets," CIE Discussion Papers 1998-06, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
    Other versions:
  6. David Levhari & Leonard J. Mirman, 1980. "The Great Fish War: An Example Using a Dynamic Cournot-Nash Solution," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 322-334, Spring. [Downloadable!] (restricted)
  7. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May. [Downloadable!] (restricted)
  8. Fudenberg, Drew & Tirole, Jean, 1985. "Preemption and Rent Equilization in the Adoption of New Technology," Review of Economic Studies, Blackwell Publishing, vol. 52(3), pages 383-401, July. [Downloadable!] (restricted)
  9. Lambson, Val Eugene, 1987. "Is the Concentration-Profit Correlation Partly an Artifact of Lumpy Technology?," American Economic Review, American Economic Association, vol. 77(4), pages 731-33, September. [Downloadable!] (restricted)
  10. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September. [Downloadable!] (restricted)
  11. repec:att:wimass:19894 is not listed on IDEAS
  12. Lambson, Val Eugene, 1992. "Competitive Profits in the Long Run," Review of Economic Studies, Blackwell Publishing, vol. 59(1), pages 125-42, January. [Downloadable!] (restricted)
  13. Amir, Rabah, 1996. "Continuous Stochastic Games of Capital Accumulation with Convex Transitions," Games and Economic Behavior, Elsevier, vol. 15(2), pages 111-131, August. [Downloadable!] (restricted)
  14. B. Douglas Bernheim, 1984. "Strategic Deterrence of Sequential Entry into an Industry," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 1-11, Spring. [Downloadable!] (restricted)
  15. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring. [Downloadable!] (restricted)
  16. Klepper, Steven, 1996. "Entry, Exit, Growth, and Innovation over the Product Life Cycle," American Economic Review, American Economic Association, vol. 86(3), pages 562-83, June. [Downloadable!] (restricted)
  17. Rob, Rafael, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Blackwell Publishing, vol. 58(4), pages 655-75, July. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. James Prieger, 2007. "The Impact of Cost Changes on Industry Entry and Exit," Journal of Economics, Springer, vol. 91(3), pages 211-243, July. [Downloadable!] (restricted)
  2. Michele Moretto, 2007. "Competition and Irreversible Investments under Uncertainty," "Marco Fanno" Working Papers 0058, Dipartimento di Scienze Economiche "Marco Fanno". [Downloadable!]
  3. Francisco Ruiz-Aliseda, 2003. "Strategic Commitment Versus Flexibility in a Duopoly with Entry and Exit," Discussion Papers 1379, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  4. Frank H. Page & Myrna H. Wooders, 2009. "Endogenous Network Dynamics," Working Papers 2009.28, Fondazione Eni Enrico Mattei. [Downloadable!]
    Other versions:
  5. Prieger, James, 2005. "The Impact of Cost Changes on Industry Dynamics," Working Papers 05-1, University of California at Davis, Department of Economics. [Downloadable!]
  6. AMIR, Rabah, 2001. "Stochastic games in economics and related fields: an overview," CORE Discussion Papers 2001060, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
  7. AMIR, Rabah & LAMBSON, Val E., 2004. "Imperfect competition, integer constraints and industry dynamics," CORE Discussion Papers 2004042, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
    Other versions:
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