Optimal firm growth under the threat of entry
Kort,Peter Wrzaczek,S.
Kort,Peter
Wrzaczek,S.
Abstract
The paper studies the incumbent-entrant problem in a fully dynamic setting. We find that under an open-loop information structure the incumbent anticipates entry by overinvesting, whereas in the Markov perfect equilibrium the incumbent slightly underinvests in the period before the entry. The entry cost level where entry accommodation passes into entry deterrence is lower in the Markov perfect equilibrium. Further we find that the incumbent’s capital stock level needed to deter entry is hump shaped as a function of the entry time, whereas the corresponding entry cost, where the entrant is indifferent between entry and non-entry, is U-shaped.
Description
Date
2015-10-01
Journal Title
Journal ISSN
Volume Title
Publisher
Research Projects
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Keywords
Economics, Game theory, Dynamic programming, C73 - Stochastic and Dynamic Games ; Evolutionary Games ; Repeated Games, D92 - Intertemporal Firm Choice, Investment, Capacity, and Financing, L13 - Oligopoly and Other Imperfect Markets
Citation
Kort, P & Wrzaczek, S 2015, 'Optimal firm growth under the threat of entry', European Journal of Operational Research, vol. 246, no. 1, pp. 281-292. https://doi.org/10.1016/j.ejor.2015.04.030