Entry and Shakeout in Dynamic Oligopoly

36 Pages Posted: 23 Jan 2015

See all articles by Paul Hünermund

Paul Hünermund

ZEW – Leibniz Centre for European Economic Research - Industrial Economics and International Management Research; KU Leuven - Department of Managerial Economics, Strategy, and Innovation

Philipp Schmidt-Dengler

University of Vienna - Faculty of Business, Economics, and Statistics

Yuya Takahashi

University of Washington

Multiple version iconThere are 2 versions of this paper

Date Written: December 2014

Abstract

In many industries, the number of firms evolves non-monotonically over time. A phase of rapid entry is followed by an industry shakeout: a large number of firms exit within a short period. We present a simple timing game of entry and exit with an exogenous technological process governing firm efficiency. We calibrate our model to data from the post World War II penicillin industry. The equilibrium dynamics of the calibrated model closely match the patterns observed in many industries. In particular, our model generates richer and more realistic dynamics than competitive models previously analyzed. The entry phase is characterized by preemption motives while the shakeout phase mimics a war of attrition. We show that dynamic strategic incentives accelerate early entry and trigger the shakeout by comparing a Markov Perfect Equilibrium to an Open-loop Equilibrium.

Keywords: Life Cycle, Dynamic Oligopoly, Preemption, War of Attrition, Penicillin

JEL Classification: L11, O

Suggested Citation

Hünermund, Paul and Schmidt-Dengler, Philipp and Takahashi, Yuya, Entry and Shakeout in Dynamic Oligopoly (December 2014). ZEW - Centre for European Economic Research Discussion Paper No. 14-116, Available at SSRN: https://ssrn.com/abstract=2553860 or http://dx.doi.org/10.2139/ssrn.2553860

Paul Hünermund (Contact Author)

ZEW – Leibniz Centre for European Economic Research - Industrial Economics and International Management Research ( email )

P.O. Box 10 34 43
L 7,1 D-68161 Mannheim
Germany

KU Leuven - Department of Managerial Economics, Strategy, and Innovation ( email )

Naamsestraat 69 bus 3500
Leuven, 3000
Belgium

Philipp Schmidt-Dengler

University of Vienna - Faculty of Business, Economics, and Statistics ( email )

Vienna, A-1210
Austria

Yuya Takahashi

University of Washington ( email )

Seattle, WA 98195
United States

HOME PAGE: http://https://econ.washington.edu/people/yuya-takahashi

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