Dynamic Price Competition, Briefly Sunk Costs, and Entry Deterrence

Abstract

This article examines how the threat of entry constrains pricing behavior in a natural monopoly with briefly sunk costs. In the model of dynamic price competition explored here, costs are too briefly sunk to confer any strategic advantage to incumbency. Despite the lack of advantage to incumbency, the threat of entry exerts little discipline on prices. In the presence of a slight cost asymmetry, monopoly for the lower-cost firm is the unique equilibrium, regardless of which firm is initially the incumbent.