Strategic learning and entry-equilibrium

Abstract

This paper describes the nature of equilibrium for a dynamic game between a monopolist and an entrant who adopts a learning strategy for cost reduction. The learning process is characterized as a continuous-time Poisson process where each success reduces a part of the entrant's cost difference with the incumbent. The entrant chooses a stream of expenditure after every success to control the instant probability of the next success. The techniques of semi-Markov decision processes are used to characterize equilibrium learning decisions at every stage, distribution of entry times, and the effects of subsidies, technical progress, etc. on pre-entry and post-entry learning strategies.