Entry, exit, and imperfect competition in the long run
(2003)
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- Abstract
- An infinite-horizon, stochastic model of entry and exit with sunk costs and imperfect competition is constructed. Simple examples provide insights into: (1) the relationship between sunk costs and industry concentration, (2) entry when current profits are negative, and (3) the relationship between entry and the length of the product cycle. A subgame perfect Nash equilibrium for the general dynamic stochastic game is shown to exist as a limit of finite-horizon equilibria. This equilibrium has a relatively simple structure characterized by two numbers per finite history. Under very general conditions, it tends to exhibit excessive entry and insufficient exit relative to a social optimum.
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Citations
Amir, R., & Lambson, V. (2003). Entry, exit, and imperfect competition in the long run (ECON Discussion Papers 2003/68). https://hdl.handle.net/2078.5/36524