Entry Patterns Over the Product Life Cycle

Abstract:     
We study a new real options model of oligopolistic entry based on empirical evidence of demand for a new product growing over time and eventually falling. Yet, firms do not know ex ante when this can occur, which creates incentives to update information by delaying irreversible entry. By assuming that the construction of a new plant takes some time and is unobservable in the meantime, while operation in the market is not, we show that entry rates accelerate or decelerate under certain conditions related to the rate at which individual profit decreases as more firms enter the industry.

Keywords: Bayesian Real Options, Investment Lags, Irreversibility, Strategic Competition, S-shaped Entry Paths

JEL Classifications: C73, D43, D92, L13, M30

Working Paper Series