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.
File(s): File format is application/pdf http://www.chicagofed.org/digital_assets/publications/working_papers/2006/wp2006_29.pdf
Provider: Federal Reserve Bank of Chicago
Part of Series: Working Paper Series
Publication Date: 2006