Preemptive Entry in Differentiated Product Markets
AbstractModels of spatial competition are typically static, and exhibit multiple free-entry equilibria. Incumbent firms can earn rents in equilibrium because any potential entrant expects a significantly lower market share (since it must fit into a niche between incumbent firms) along with fiercer price competition. Previous research has usually concentrated on the zero-profit equilibrium, at which there is normally excessive entry, and so an entry tax would improve the allocation of resources. At the other extreme, the equilibrium with the greatest rent per firm normally entails insufficient entry, so an entry subsidy should be prescribed. A model of sequential firm entry (with an exogenous order of moves) resolves the multiplicity problem but raises a new difficulty: firms that enter earlier can expect higher spatial rents, and so firms prefer to be earlier in the entry order. This tension disappears when firms can compete for entry positions. We therefore suppose that firms can commit capital early to the market in order to lay claim to a particular location. This temporal competition dissipates spatial rents in equilibrium and justifies the sequential move structure. However, the policy implications are quite different once time is introduced. An atemporal analysis of the sequential entry process would prescribe an entry subsidy, but once proper account is taken of the entry dynamics, a tax may be preferable.
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Bibliographic InfoPaper provided by University of Virginia, Department of Economics in its series Virginia Economics Online Papers with number 334.
Length: 24 pages
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Product differentiation; rent dissipation; entry deterrence; entry timing; sequential entry;
Other versions of this item:
- Simon P. Anderson & Maxim Engers, 2001. "Preemptive entry in differentiated product markets," Economic Theory, Springer, vol. 17(2), pages 419-445.
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
This paper has been announced in the following NEP Reports:
- NEP-ALL-2000-02-21 (All new papers)
- NEP-IND-2000-02-21 (Industrial Organization)
- NEP-MIC-2000-02-21 (Microeconomics)
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