Inference on noncooperative entry deterrence

Abstract

AbstractThis study empirically investigates strategic entry‐deterrence behavior under oligopolistic competition. I develop a structural econometric model describing incumbents' entry‐deterrence behavior based on the framework of Gilbert and Vives. I show theoretically that incumbents' marginal costs are interval‐identified under the assumption that incumbents deter entry in equilibrium. The structural model is estimated using data from the Japanese aluminum smelting industry. A Vuong‐type model selection test utilizing an instrument demonstrates that the entry‐deterrence model is more consistent with the data than an ordinary Cournot competition model without entry threats.