nep-ind New Economics Papers
on Industrial Organization
Issue of 2007‒05‒26
two papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Duopoly Dynamics with a Barrier to Entry By Jaap H. Abbring; Jeffrey R. Campbell
  2. Mergers in Asymmetric Stackelberg Markets By Marc Escrihuela Villar; Ramon Fauli Oller

  1. By: Jaap H. Abbring (Vrije Universiteit Amsterdam); Jeffrey R. Campbell (Federal Reserve Bank of Chicago, and NBER)
    Abstract: This paper considers the effects of raising the cost of entry for a potential competitor on infinite-horizon Markov-perfect duopoly 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 leaving behind an active younger rival. We prove that raising a second producer's sunk entry cost in an industry that supports at most two firms reduces the probability of having a duopoly but increases the probability that some firm will serve the industry. Numerical experiments indicate that a barrier to entry's quantitative relevance depends on demand shocks' serial correlation. If they are not very persistent, the direct entry-deterring effect of a barrier to a second firm's entry greatly reduces the average number of active firms. The indirect entry-encouraging effect does little to offset this. With highly persistent demand shocks, the direct effect is small and the barrier to entry has no substantial effect on the number of competitors. This confirms Carlton's (2004) assertion that the effects of a barrier depend crucially on industry dynamics that two-stage "short run/long run" models capture poorly.
    Keywords: LIFO; FIFO; Sunk costs; Markov-perfect equilibrium; Competition policy
    JEL: L13 L41
    Date: 2007–04–27
    URL: http://d.repec.org/n?u=RePEc:dgr:uvatin:20070037&r=ind
  2. By: Marc Escrihuela Villar; Ramon Fauli Oller (School of Economics, Universidad de Guanajuato)
    Abstract: It is well known that the profitability of horizontal mergers with quantity competition is scarce. However, in an asymmetric Stackelberg market we obtain that some mergers are profitable. Our main result is that mergers among followers become profitable when the followers are inefficient enough. In this case, leaders reduce their output when followers merge and this reduction renders the merger profitable. This merger increases price and welfare is reduced.
    Keywords: Mergers, Asymmetries, Stackelberg
    JEL: L13 L40 L41
    URL: http://d.repec.org/n?u=RePEc:gua:wpaper:ec200701&r=ind

This nep-ind issue is ©2007 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at http://nep.repec.org. For comments please write to the director of NEP, Marco Novarese at <director@nep.repec.org>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.