Intertemporal Market Divison A Case of Alternating Monopoly

Abstract

In dynamic entry-and-exit models, common understanding is that potential entrants will enter into the market up to the point where all excess profits are eroded. Dominant incumbent positions are possible only under specific circumstances, such as the presence of substantial barriers to entry, or when incumbents can credibly threaten to punish rivals with losses upon entry. In this paper, we report on an equilibrium with market dominance that exists in a simple two-firm model that features neither entry barriers nor punishment strategies. this equilibrium induces an alternating monopoly - despite the fact that the model also sustains a Cournot duopoly. Even when initially both firms are active in the market, an alternating monopoly reveals itself rather quickly. Moreover, the alternating monopoly equilibrium Pareto dominates the Cournot equilibrium - as it is close to the cartel outcom.