Working Paper

Oligopoly dynamics with barriers to entry

Abstract: This paper considers the effects of raising the cost of entry for potential competitors on infinite-horizon Markov- perfect industry dynamics with ongoing demand uncertainty. All entrants serving the model industry incur sunk costs, and exit avoids future fixed costs. We focus on the unique equilibrium with last- in first-out expectations: a firm never exits before a younger rival does. When an industry can support at most two firms, we prove that raising barriers to a second producer?s entry increases the probability that some firm will serve the industry and decreases its long-run entry and exit rates. In numerical examples with more than two firms, imposing a barrier to entry stabilizes industry structure.

Keywords: Oligopolies;

Bibliographic Information

Provider: Federal Reserve Bank of Chicago

Part of Series: Working Paper Series

Publication Date: 2006

Number: WP-06-29