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Entry and shakeout in dynamic oligopoly

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  • Hünermund, Paul
  • Schmidt-Dengler, Philipp
  • Takahashi, Yuya

Abstract

In many industries, the number of firms evolves non-monotonically over time. A phase of rapid entry is followed by an industry shakeout: a large number of firms exit within a short period. We present a simple timing game of entry and exit with an exogenous technological process governing firm efficiency. We calibrate our model to data from the post World War II penicillin industry. The equilibrium dynamics of the calibrated model closely match the patterns observed in many industries. In particular, our model generates richer and more realistic dynamics than competitive models previously analyzed. The entry phase is characterized by preemption motives while the shakeout phase mimics a war of attrition. We show that dynamic strategic incentives accelerate early entry and trigger the shakeout by comparing a Markov Perfect Equilibrium to an Open-loop Equilibrium.

Suggested Citation

  • Hünermund, Paul & Schmidt-Dengler, Philipp & Takahashi, Yuya, 2014. "Entry and shakeout in dynamic oligopoly," ZEW Discussion Papers 14-116, ZEW - Leibniz Centre for European Economic Research.
  • Handle: RePEc:zbw:zewdip:14116
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    References listed on IDEAS

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    Cited by:

    1. Mitsuru Igami, 2018. "Industry Dynamics of Offshoring: The Case of Hard Disk Drives," American Economic Journal: Microeconomics, American Economic Association, vol. 10(1), pages 67-101, February.

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    More about this item

    Keywords

    Life Cycle; Dynamic Oligopoly; Preemption; War of Attrition; Penicillin;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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