Auctions of licences and market structure

Abstract

This paper studies sequential auctions of licences to participate in a symmetric market game. Assuming that the rate at which industry profits decrease with repeated entry is not too large, at the unique solution either a single firm preempts entry altogether or entry occurs in every stage, depending on the net benefit of complete preemption to an incumbent. If we relax the assumption, a third outcome can occur: two firms may coordinate their choices to avoid further entry. The analysis employs a new refinement of Nash equilibrium, the concept of recursively undominated equilibrium.