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Preemptive Entry in Differentiated Product Markets

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  • Simon P. Anderson

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  • Maxim Engers

    ()

Abstract

Models 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 Info

Paper provided by University of Virginia, Department of Economics in its series Virginia Economics Online Papers with number 334.

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Length: 24 pages
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Handle: RePEc:vir:virpap:334

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Web page: http://www.virginia.edu/economics/home.html

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Keywords: Product differentiation; rent dissipation; entry deterrence; entry timing; sequential entry;

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  1. Spence, Michael, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 43(2), pages 217-35, June.
  2. Anderson, Simon P & Engers, Maxim, 1994. "Strategic Investment and Timing of Entry," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(4), pages 833-53, November.
  3. Eaton, B Curtis & Schmitt, Nicolas, 1994. "Flexible Manufacturing and Market Structure," American Economic Review, American Economic Association, American Economic Association, vol. 84(4), pages 875-88, September.
  4. Capozza, Dennis R & Van Order, Robert, 1980. "Unique Equilibria, Pure Profits, and Efficiency in Location Models," American Economic Review, American Economic Association, American Economic Association, vol. 70(5), pages 1046-53, December.
  5. Vickrey, William S. & Anderson, Simon P. & Braid, Ralph M., 1999. "Spatial competition, monopolistic competition, and optimum product diversity," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 17(7), pages 953-963, October.
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Cited by:
  1. Aurélie Bonein & Stéphane Turolla, 2007. "Sequential Location under one-sided Demand Uncertainty," Working Papers, LAMETA, Universtiy of Montpellier 07-12, LAMETA, Universtiy of Montpellier, revised Nov 2007.
  2. Simon Loertscher & Gerd Muehlheusser, 2008. "Dynamic Location Games," Department of Economics - Working Papers Series, The University of Melbourne 1042, The University of Melbourne.
  3. Matsumura, Toshihiro & Okamura, Makoto, 2006. "A note on the excess entry theorem in spatial markets," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 24(5), pages 1071-1076, September.
  4. ANDERSON, Simon P. & GABSZEWICZ, Jean J., 2005. "The media and advertising : a tale of two-sided markets," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2005088, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Innes, Robert, 2008. "Entry for merger with flexible manufacturing: Implications for competition policy," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 26(1), pages 266-287, January.
  6. Luis M. B. Cabral, 2001. "Horizontal Mergers With Free-Entry: Why Cost Efficiencies May Be a Weak Defense and Asset Sales a Poor Remedy," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 01-05, New York University, Leonard N. Stern School of Business, Department of Economics.
  7. AMIR, Rabah & LAMBSON, Val E., 2004. "Imperfect competition, integer constraints and industry dynamics," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2004042, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Gupta, Barnali & Lai, Fu-Chuan & Pal, Debashis & Sarkar, Jyotirmoy & Yu, Chia-Ming, 2004. "Where to locate in a circular city?," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 22(6), pages 759-782, June.

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