Abstract:Beginning with the pioneering work of Bain (1956) and Sylos-Labini (1964), the entryprevention literature has concentrated on the case of an incumbent firm (or colluding incumbents) facing potential e...Beginning with the pioneering work of Bain (1956) and Sylos-Labini (1964), the entryprevention literature has concentrated on the case of an incumbent firm (or colluding incumbents) facing potential entry. This includes, for example, Dixit (1979), (1980), Milgrom and Roberts (1982) and Spence (1977), and the papers surveyed in Gilbert (forthcoming). Yet examples where a single firm has maintained persistent control of a market that is not a natural monopoly are rare. More common are situations where one or a few firms have remained dominant in an industry over significant periods and where industry concentration levels have remained higher than could be justified by technological conditions. Hence a more realistic setting for examining incentives for entry prevention is that of an established oligopoly facing a potential entrant where all firms are strategic agents playing a noncooperative game.' We consider a market for a homogeneous product with an established m firm oligopoly facing a potential entrant which must pay a fixed cost to enter the industry. Marginal costs are constant and equal for all firms. In the first stage of the entry game the incumbents decide independently how much to produce. In the second stage the potential entrant decides whether to enter or not, and if it enters how much to produce. For any level of the entry cost there is an associated entry preventing output, and incumbents can protect themselves from new competition by producing at least this amount. Restricting attention to subgame perfect equilibria, we find that if entry is not blockaded (i.e. if the limit output is larger than the m-firm Cournot output), three regions for the entry preventing output describe the possible outcomes. If the limit output is small, entry is prevented by incumbents and typically there is a continuum of entry preventing equilibria. If the limit output is large, entry is allowed by incumbents and total output is less than the entry preventing output. For limit outputs in an intermediate region both types of equilibria exist. Like national defense, entry prevention in this model is a public good. If any firm produces enough to deter entry, all firms are protected from competition. Thus each firm could free-ride on the entry preventing activities of its competitors with the implicationRead More
Publication Year: 1986
Publication Date: 1986-01-01
Language: en
Type: article
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