Entry, Exit, and Imperfect Competition in the Long Run
CORE Discussion Paper No. 2003/66
31 Pages Posted: 3 Jun 2007
Date Written: September 2003
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.
Keywords: Entry, Exit, Dynamic games, Integer constraints
JEL Classification: C73, D43, L13
Suggested Citation: Suggested Citation