Entry Deterrence and Experimentation under Demand Uncertainty
43 Pages Posted: 30 Jun 2008 Last revised: 6 May 2009
Date Written: May 5, 2009
We examine the effect of a threat of entry on experimentation about demand by an incumbent monopolist when there is a fixed cost of entry. We also examine the impact of experimentation on the probability of entry into the market. We show that experimentation may itself be used as a tool for entry deterrence and derive conditions under which experimentation reduces the probability of entry. These conditions depend on the entry rule which in turn depends on entry costs. We show that if experimentation does not deter entry, the monopolist incumbent experiments less. We also characterize experimentation and entry in the linear-uniform example.
Keywords: entry, experimentation, learning
JEL Classification: D4, D8, L1, L2
Suggested Citation: Suggested Citation