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Preemptive entry in differentiated product markets

Preemptive entry in differentiated product markets Economic Theory 17, 419–445 (2001) Simon P. Anderson and Maxim Engers Department of Economics, UVA, Charlottesville, VA 22903, USA (e-mail: sa9w@virginia.edu; maxim@virginia.edu) Received: April 26, 1999; revised version: September 22, 1999 Summary. Models of spatial competition are typically static, and exhibit multi- ple free-entry equilibria. Incumbent firms can earn rents in equilibrium because any potential entrant expects a significantly lower market share (since it must fit into a niche between incumbent firms) along with fiercer price competition. Pre- vious research has usually concentrated on the zero-profit equilibrium, at which there is normally excessive entry, and so an entry tax would improve the alloca- tion of resources. At the other extreme, the equilibrium with the greatest rent per firm normally entails insufficient entry, so an entry subsidy should be prescribed. A model of sequential firm entry (with an exogenous order of moves) resolves the multiplicity problem but raises a new difficulty: firms that enter earlier can expect higher spatial rents, and so firms prefer to be earlier in the entry order. This tension disappears when firms can compete for entry positions. We there- fore suppose that firms can commit capital early to the market in order to lay claim to http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Economic Theory Springer Journals

Preemptive entry in differentiated product markets

Economic Theory , Volume 17 (2) – Mar 1, 2001

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References (28)

Publisher
Springer Journals
Copyright
Copyright © 2001 by Springer-Verlag Berlin Heidelberg
Subject
Economics; Economic Theory/Quantitative Economics/Mathematical Methods; Game Theory, Economics, Social and Behav. Sciences; Microeconomics; Public Finance
ISSN
0938-2259
eISSN
1432-0479
DOI
10.1007/PL00004112
Publisher site
See Article on Publisher Site

Abstract

Economic Theory 17, 419–445 (2001) Simon P. Anderson and Maxim Engers Department of Economics, UVA, Charlottesville, VA 22903, USA (e-mail: sa9w@virginia.edu; maxim@virginia.edu) Received: April 26, 1999; revised version: September 22, 1999 Summary. Models of spatial competition are typically static, and exhibit multi- ple free-entry equilibria. Incumbent firms can earn rents in equilibrium because any potential entrant expects a significantly lower market share (since it must fit into a niche between incumbent firms) along with fiercer price competition. Pre- vious research has usually concentrated on the zero-profit equilibrium, at which there is normally excessive entry, and so an entry tax would improve the alloca- tion of resources. At the other extreme, the equilibrium with the greatest rent per firm normally entails insufficient entry, so an entry subsidy should be prescribed. A model of sequential firm entry (with an exogenous order of moves) resolves the multiplicity problem but raises a new difficulty: firms that enter earlier can expect higher spatial rents, and so firms prefer to be earlier in the entry order. This tension disappears when firms can compete for entry positions. We there- fore suppose that firms can commit capital early to the market in order to lay claim to

Journal

Economic TheorySpringer Journals

Published: Mar 1, 2001

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