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Entry Patterns over the Product Life Cycle

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  • Oscar Gutierrez Arnaiz
  • Francisco Ruiz-Aliseda

Abstract

We study a game-theoretic real options model of new market entry based on empirical evidence of demand for a new product growing over time and eventually falling. Yet, firms do not know ex ante when this will occur, which creates incentives to update information by delaying irreversible entry. By assuming that the construction of a new productive plant takes some time and is unobservable in the meantime, while operation in the market is not, we show that entry rates increase or decrease under certain conditions related to the rate at which flow profits decrease as more firms enter the industry. Copyright � 2009 The Authors. Journal compilation � 2009 Blackwell Publishing Ltd and The University of Manchester.

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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1380.

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Date of creation: Oct 2003
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Handle: RePEc:nwu:cmsems:1380

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  1. Nicolas P. B. Bollen, 1999. "Real Options and Product Life Cycles," Management Science, INFORMS, vol. 45(5), pages 670-684, May.
  2. Polli, Rolando & Cook, Victor, 1969. "Validity of the Product Life Cycle," The Journal of Business, University of Chicago Press, vol. 42(4), pages 385-400, October.
  3. Alessandro Barbarino & Boyan Jovanovic, 2007. "Shakeouts And Market Crashes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(2), pages 385-420, 05.
  4. John Londregan, 1990. "Entry and Exit over the Industry Life Cycle," RAND Journal of Economics, The RAND Corporation, vol. 21(3), pages 446-458, Autumn.
  5. Bass, Frank M, 1980. "The Relationship between Diffusion Rates, Experience Curves, and Demand Elasticities for Consumer Durable Technological Innovations," The Journal of Business, University of Chicago Press, vol. 53(3), pages S51-67, July.
  6. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
  7. Oscar Gutierrez Arnaiz & Francisco Ruiz-Aliseda, 2003. "Real Options with Unknown-Date Events," Discussion Papers 1378, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Joe A. Dodson, Jr. & Eitan Muller, 1978. "Models of New Product Diffusion Through Advertising and Word-of-Mouth," Management Science, INFORMS, vol. 24(15), pages 1568-1578, November.
  9. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  10. Gort, Michael & Klepper, Steven, 1982. "Time Paths in the Diffusion of Product Innovations," Economic Journal, Royal Economic Society, vol. 92(367), pages 630-53, September.
  11. Gary L. Lilien & Eunsang Yoon, 1990. "The Timing of Competitive Market Entry: An Exploratory Study of New Industrial Products," Management Science, INFORMS, vol. 36(5), pages 568-585, May.
  12. Steven Klepper & Elizabeth Graddy, 1990. "The Evolution of New Industries and the Determinants of Market Structure," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 27-44, Spring.
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Cited by:
  1. Oscar Gutierrez Arnaiz & Francisco Ruiz-Aliseda, 2003. "Real Options with Unknown-Date Events," Discussion Papers 1378, Northwestern University, Center for Mathematical Studies in Economics and Management Science.

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