Entry Deterrence In The Commons

In this paper we analyze a model in which initially there is a single firm that harvests from a common property resource. The firm faces potential entry of a rival in the future. The costs of harvest from the resource is a function of the stock size. By drawing down the initial population, the monopolist credibly commits to a smaller future stock. Because this increases costs, in particular the entrant’s, it makes the post-entry equilibrium less profitable for the entrant. By drawing down the current stock sufficiently, the incumbent can make entry unprofitable. Of course this raises the monopolist’s costs as well; if there requisite first period harvest is sufficiently great, deterrence will prove unattractive. We analyze the conditions under which the incumbent firm would deter entry and when entry would be allowed. Further, we analyze the effect that potential entry has on the harvest rate both before and after the date of potential entry and whether or not potential entry is welfare improving.