Entry, Exit, and Imperfect Competition in the Long Run
University of Arizona - Department of Economics; University of Arizona
Val E. Lambson
Brigham Young University - Department of Economics
CORE Discussion Paper No. 2003/66
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 equilibrium has 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.
Number of Pages in PDF File: 31
Keywords: Entry, Exit, Dynamic games, Integer constraints
JEL Classification: C73, D43, L13working papers series
Date posted: June 3, 2007
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