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Industry Dynamics with Barriers to Entry

Author

Listed:
  • Jaap H. Abbring
  • Jeffrey R. Campbell

    (Federal Reserve Bank of Chicago)

Abstract

This paper considers the effects of a monopolist raising the cost of entry for potential competitors on Markov-perfect industry dynamics. All entrants serving the model industry incur sunk costs, which they partially recover when exiting. Empirically, the probability of exit declines with the age of the firm. This fact motivates the assumption that an entering firm expects to exit before any incumbent firms. This last-in-first-out assumption selects a unique Markov-perfect equilibrium. With demand shocks that are either uniformly or normally distributed, a sequence of demand thresholds describes firms' equilibrium entry and survival decisions. We calibrate the model to observations from concentrated manufacturing industries and quantify the effects of barriers to entry on the equilibrium number of firms

Suggested Citation

  • Jaap H. Abbring & Jeffrey R. Campbell, 2006. "Industry Dynamics with Barriers to Entry," 2006 Meeting Papers 360, Society for Economic Dynamics.
    • Handle: RePEc:red:sed006:360
    as

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    More about this item

    Keywords

    Markov-perfect equilibrium. Stackelberg Timing; Calibration;

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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