Delegation, market share and the limit price in sequential entry models

Abstract

We construct a model of equilibrium market structure with sequential entry in which firms have U-shaped average cost curves. The equilibrium is characterized completely in the case of linear demand and quadratic costs. In particular, the trade-off between the incentive to delegate the costs of entry deterrence and the market share advantages of investment by early entrants is fully determined. We determine the circumstances under which delegation occurs. Whether firms delegated the task of entry deterrence find it costly or not is shown to depend in a parametric way on the limit price. We show that the strategic equilibrium is socially inefficient relative to the free-entry Cournot equilibrium.