IDEAS home Printed from https://ideas.repec.org/p/cor/louvco/2003066.html
   My bibliography  Save this paper

Entry, exit, and imperfect competition in the long run

Author

Listed:
  • AMIR, Rabah
  • LAMBSON, Val

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 equilibriumhas 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.

Suggested Citation

  • AMIR, Rabah & LAMBSON, Val, 2003. "Entry, exit, and imperfect competition in the long run," LIDAM Discussion Papers CORE 2003066, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2003066
    as

    Download full text from publisher

    File URL: https://sites.uclouvain.be/core/publications/coredp/coredp2003.html
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Dewey, Donald, 1976. "Industrial Concentration and the Rate of Profit: Some Neglected Theory," Journal of Law and Economics, University of Chicago Press, vol. 19(1), pages 67-78, April.
    2. Fudenberg, Drew & Tirole, Jean, 1987. "Understanding Rent Dissipation: On the Use of Game Theory in Industrial Organization," American Economic Review, American Economic Association, vol. 77(2), pages 176-183, May.
    3. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, April.
    4. Tsutsui, Shunichi & Mino, Kazuo, 1990. "Nonlinear strategies in dynamic duopolistic competition with sticky prices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 136-161, October.
    5. Rabah Amir & Val E. Lambson, 2000. "On the Effects of Entry in Cournot Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(2), pages 235-254.
    6. B. Douglas Bernheim, 1984. "Strategic Deterrence of Sequential Entry into an Industry," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 1-11, Spring.
    7. Val Eugene Lambson, 1992. "Competitive Profits in the Long Run," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(1), pages 125-142.
    8. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
    9. Lambson, V.E., 1989. "Industry Evolution With Sunk Costs And Uncertian Market Conditions," Working papers 8904, Wisconsin Madison - Social Systems.
    10. Amir, Rabah, 1996. "Continuous Stochastic Games of Capital Accumulation with Convex Transitions," Games and Economic Behavior, Elsevier, vol. 15(2), pages 111-131, August.
    11. Richard Ericson & Ariel Pakes, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 62(1), pages 53-82.
    12. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-638, June.
    13. Rafael Rob, 1991. "Learning and Capacity Expansion under Demand Uncertainty," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(4), pages 655-675.
    14. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-670, May.
    15. David Levhari & Leonard J. Mirman, 1980. "The Great Fish War: An Example Using a Dynamic Cournot-Nash Solution," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 322-334, Spring.
    16. Lambson, Val Eugene, 1987. "Is the Concentration-Profit Correlation Partly an Artifact of Lumpy Technology?," American Economic Review, American Economic Association, vol. 77(4), pages 731-733, September.
    17. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-1150, September.
    18. Klepper, Steven, 1996. "Entry, Exit, Growth, and Innovation over the Product Life Cycle," American Economic Review, American Economic Association, vol. 86(3), pages 562-583, June.
    19. Unknown, 1986. "Letters," Choices: The Magazine of Food, Farm, and Resource Issues, Agricultural and Applied Economics Association, vol. 1(4), pages 1-9.
    20. La Manna, Manfredi M. A., 1986. "Why are profits correlated with concentration?," Economics Letters, Elsevier, vol. 22(1), pages 81-85.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gong, Rui & Page, Frank & Wooders, Myrna, 2015. "Endogenous correlated network dynamics," LSE Research Online Documents on Economics 65098, London School of Economics and Political Science, LSE Library.
    2. Vera Ivanova & Philip Ushchev, 2019. "Product Differentiation, Competitive Toughness, and Intertemporal Substitution," Scandinavian Journal of Economics, Wiley Blackwell, vol. 121(3), pages 1244-1269, July.
    3. Herings, P. Jean-Jacques & Peeters, Ronald & Schinkel, Maarten Pieter, 2005. "Intertemporal market division:: A case of alternating monopoly," European Economic Review, Elsevier, vol. 49(5), pages 1207-1223, July.
    4. James Prieger, 2007. "The Impact of Cost Changes on Industry Entry and Exit," Journal of Economics, Springer, vol. 91(3), pages 211-243, July.
    5. Moretto, Michele, 2008. "Competition and irreversible investments under uncertainty," Information Economics and Policy, Elsevier, vol. 20(1), pages 75-88, March.
    6. Rupayan Pal & Ruichao Song, 2019. "Externalities, entry bias and optimal subsidy policy in oligopoly," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2019-028, Indira Gandhi Institute of Development Research, Mumbai, India.
    7. Frank H. Page & Myrna H. Wooders, 2009. "Endogenous Network Dynamics," Working Papers 2009.28, Fondazione Eni Enrico Mattei.
    8. Amir, Rabah & Lambson, Val E., 2007. "Imperfect competition, integer constraints and industry dynamics," International Journal of Industrial Organization, Elsevier, vol. 25(2), pages 261-274, April.
    9. Francisco Ruiz-Aliseda, 2003. "Strategic Commitment Versus Flexibility in a Duopoly with Entry and Exit," Discussion Papers 1379, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    10. Cerboni Baiardi, Lorenzo & Lamantia, Fabio, 2022. "Oligopoly dynamics with isoelastic demand: The joint effects of market saturation and strategic delegation," Chaos, Solitons & Fractals, Elsevier, vol. 158(C).
    11. James E. Prieger, 2005. "The Impact of Cost Changes on Industry Dynamics," Working Papers 51, University of California, Davis, Department of Economics.
    12. Ruiz-Aliseda, Francisco, 2016. "Preemptive investments under uncertainty, credibility and first mover advantages," International Journal of Industrial Organization, Elsevier, vol. 44(C), pages 123-137.
    13. Rupayan Pal & Marcella Scrimitore & Ruichao Song, 2023. "Externalities, entry bias, and optimal subsidy policy for cleaner environment," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 25(1), pages 90-122, February.
    14. Amir, Rabah & Halmenschlager, Christine & Jin, Jim, 2011. "R&D-induced industry polarization and shake-outs," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 386-398, July.
    15. Óscar Gutiérrez & Francisco Ruiz‐Aliseda, 2009. "Entry Patterns Over The Product Life Cycle," Manchester School, University of Manchester, vol. 77(5), pages 594-610, September.
    16. Edeoba William Edobor & Maria I. Marshall, 2021. "Earth, wind, water, fire and man: How disasters impact firm births in the USA," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 107(1), pages 395-421, May.
    17. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899, September.
    18. Amir, Rabah & De Castro, Luciano & Koutsougeras, Leonidas, 2014. "Free entry versus socially optimal entry," Journal of Economic Theory, Elsevier, vol. 154(C), pages 112-125.
    19. Huang, Bing & Cao, Jiling & Chung, Hyuck, 2014. "Strategic real options with stochastic volatility in a duopoly model," Chaos, Solitons & Fractals, Elsevier, vol. 58(C), pages 40-51.
    20. James E. Prieger, 2005. "The Impact of Cost Changes on Industry Dynamics," Working Papers 165, University of California, Davis, Department of Economics.
    21. Laszlo Goerke, 2022. "Partisan competition authorities, Cournot‐oligopoly, and endogenous market structure," Southern Economic Journal, John Wiley & Sons, vol. 89(1), pages 238-270, July.
    22. De Monte Enrico, 2024. "Nonparametric Instrumental Regression with Two-Way Fixed Effects," Journal of Econometric Methods, De Gruyter, vol. 13(1), pages 49-66, January.
    23. Laszlo Goerke, 2022. "Endogenous Market Structure and Partisan Competition Authorities," IAAEU Discussion Papers 202201, Institute of Labour Law and Industrial Relations in the European Union (IAAEU).
    24. Bertomeu, Jeremy, 2009. "Endogenous shakeouts," International Journal of Industrial Organization, Elsevier, vol. 27(3), pages 435-440, May.
    25. Luo, Guo Ying, 2009. "Irrationality and monopolistic competition: An evolutionary approach," European Economic Review, Elsevier, vol. 53(5), pages 512-526, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Amir, Rabah & Lambson, Val E., 2007. "Imperfect competition, integer constraints and industry dynamics," International Journal of Industrial Organization, Elsevier, vol. 25(2), pages 261-274, April.
    2. Moretto, Michele, 2008. "Competition and irreversible investments under uncertainty," Information Economics and Policy, Elsevier, vol. 20(1), pages 75-88, March.
    3. Amir, Rabah & Halmenschlager, Christine & Jin, Jim, 2011. "R&D-induced industry polarization and shake-outs," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 386-398, July.
    4. David Greenstreet, 2007. "Exploiting Sequential Learning to Estimate Establishment-Level Productivity Dynamics and Decision Rules," Economics Series Working Papers 345, University of Oxford, Department of Economics.
    5. Santanu Roy & Takashi Kamihigashi, 2004. "Investment, Externalities & Industry Dynamics," Econometric Society 2004 North American Summer Meetings 144, Econometric Society.
    6. Viktoria Kocsis & Victoria Shestalova & Henry van der Wiel & Nick Zubanov & Ruslan Lukach & Bert Minne, 2009. "Relation entry, exit and productivity: an overview of recent theoretical and empirical literature," CPB Document 180.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    7. Gotz, Georg, 2002. "Sunk costs, windows of profit opportunities, and the dynamics of entry," International Journal of Industrial Organization, Elsevier, vol. 20(10), pages 1409-1436, December.
    8. Adelina Gschwandtner & Val E. Lambson, 2004. "Sunk costs, Profit Volatility, and Turnover," Vienna Economics Papers 0405, University of Vienna, Department of Economics.
    9. Suzanne Kok & Nicole Bosch & Anja Deelen & Rob Euwals, 2011. "Migrant Women on the Labour Market," CPB Discussion Paper 180.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    10. Blanchard, Pierre & Huiban, Jean-Pierre & Mathieu, Claude, 2011. "Productivity, sunk costs and firm exit in the French food industry," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114526, European Association of Agricultural Economists.
    11. Bester, Helmut & Petrakis, Emmanuel, 2003. "Wages and productivity growth in a competitive industry," Journal of Economic Theory, Elsevier, vol. 109(1), pages 52-69, March.
    12. David B. Audretsch & Max Keilbach, 2006. "Entrepreneurship, Growth and Restructuring," Papers on Entrepreneurship, Growth and Public Policy 2006-13, Max Planck Institute of Economics, Entrepreneurship, Growth and Public Policy Group.
    13. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899, September.
    14. Di Corato, Luca & Maoz, Yishay D., 2019. "Production externalities and investment caps: A welfare analysis under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 106(C), pages 1-1.
    15. Raquel Ortega-Argilés & Rosina Moreno, 2005. "Firm Competitive Strategies And The Likelihood Of Survival - The Spanish Case," ERSA conference papers ersa05p347, European Regional Science Association.
    16. Volker Nocke, 2006. "A Gap for Me: Entrepreneurs and Entry," Journal of the European Economic Association, MIT Press, vol. 4(5), pages 929-956, September.
    17. Jason P. Brown & Dayton M. Lambert & Raymond J. G. M. Florax, 2013. "The Birth, Death, and Persistence of Firms: Creative Destruction and the Spatial Distribution of U.S. Manufacturing Establishments, 2000–2006," Economic Geography, Clark University, vol. 89(3), pages 203-226, July.
    18. Yang, Qing Gong & Temple, Paul, 2012. "Reform and competitive selection in China: An analysis of firm exits," Structural Change and Economic Dynamics, Elsevier, vol. 23(3), pages 286-299.
    19. Jaan Masso & Amaresh K Tiwari, 2021. "Productivity Implications Of R&D, Innovation And Capital Accumulation For Incumbents And Entrants: The Case Of Estonia," University of Tartu - Faculty of Economics and Business Administration Working Paper Series 130, Faculty of Economics and Business Administration, University of Tartu (Estonia).
    20. Jože P. Damijan & Črt Kostevc & Sašo Polanec, 2010. "From Innovation to Exporting or Vice Versa?," The World Economy, Wiley Blackwell, vol. 33(3), pages 374-398, March.

    More about this item

    Keywords

    entry; exit; dynamic games; integer constraints;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cor:louvco:2003066. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Alain GILLIS (email available below). General contact details of provider: https://edirc.repec.org/data/coreebe.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.