Entry Equilibrium Research Articles

Inference on noncooperative entry deterrence

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.

Trade, industrial, and privatization policies with endogenous market structure

AbstractThis study finds that in an international mixed oligopoly at free entry equilibrium, social welfare under import tariff cum privatization is higher than output subsidy cum privatization, and the dual subsidy‐tariff policy cum privatization degenerates into a single tariff policy cum privatization. The reason is that an output subsidy or the dual subsidy‐tariff policy will incentivize domestic private firms to enter the free‐entry equilibrium. Thus, the number of domestic firms with free entry is excessive, and social welfare deteriorates. A privatization policy is pivotal in the long run and is still more effective than a single subsidy policy.

Attractive target for tax avoidance: trade liberalization and entry mode

AbstractGrowing foreign direct investments (FDIs) have been observed in parallel to the development of tax avoidance by multinational enterprises; however, empirical evidence indicates the asymmetric effects of trade costs on a firm’s entry decision. To give a new rationale and insights into the impacts of transfer pricing and trade liberalization on a firm’s global activities, this study incorporates transfer pricing and investigates a foreign firm’s entry decision: exports, greenfield FDI (GFDI), or cross-border mergers and acquisitions (CM&As). We show that CM&A is the equilibrium entry mode when transfer pricing regulation is loose, whereas the choice between exports and GFDI depends on the fixed costs of GFDI. Moreover, trade liberalization increases the likelihood of CM&A but decreases that of exports because a reduction in trade costs enhances tax-avoidance efficiency due to more intrafirm trade, implying that tax avoidance in the form of CM&A becomes crucial as globalization progresses. Our welfare analysis shows that regulating CM&A based on consumers’ benefits may result in welfare reduction because profit shifting is most effective under CM&A and a host country’s tax revenue from the foreign firm increases. The results imply the importance of considering the link between international tax and antitrust policies.

Dynamic model of entry: Dollar stores

AbstractDollar stores have become the fastest‐growing retail format in the United States. However, there is considerable controversy regarding their entry, particularly into markets without grocery stores, and concerns that dollar‐store entry decisions are motivated by preemptive incentives. In this paper, we aim to study the market entry of dollar stores as an equilibrium phenomenon and to examine their impact on competing store formats in a dynamic environment. We use census‐tract level data and develop a dynamic model of oligopolistic competition to estimate the impact of dollar store entry on the equilibrium entry decisions of other retailers of the same format and other formats. We find that supermarkets and other large‐format owners thrive as dollar‐store expansion removes their “competitive fringe” in shared markets, whereas other small‐format stores (other dollar stores, convenience stores, and superettes) do not. Our findings have broad implications for the effect of dollar store entry on consumer welfare, as dollar‐store entry is not associated with grocery‐store exit but rather the exit of other small‐format stores.

Resale in second‐price auctions with private entry

AbstractThis paper investigates the effects of resale on bidders' entry decisions, social welfare, and seller's expected revenue in a second‐price auction with two‐dimensional private information on values and participation costs. We establish the existence of symmetric entry equilibrium and identify sufficient conditions under which the equilibrium is unique. We show that when resale is allowed, the low‐cost bidders become more aggressive on entry, while the high‐cost bidders are less likely to enter. Furthermore, our analysis also suggests resale allowance can increase the social welfare under a sufficient condition, which depends on the magnitude of bargaining power, and its effect on expected revenue is ambiguous.

Foreign Ownership, Privatization and Strategic Industrial Policy in a Free-Entry Cournot Oligopoly

In this paper, we show that under mixed oligopoly and free market entry, the government’s output subsidies are positive and will not be affected by foreign holdings; however, under complete privatization and free market entry, the government needs to collect a production tax due to excessive market entry. We further demonstrate that the social welfare with privatization will be lower than that without privatization regardless of the shareholding of foreign owners in the free entry equilibrium. This result implies that when the market is completely free and open, it is necessary for state-owned enterprises to enter the market to ease excessive market competition.

Cost uncertainty in an oligopoly with endogenous entry

AbstractHow does cost uncertainty affect the welfare consequences of an oligopoly? To answer this question, we investigate a Cournot oligopoly in which firms produce a homogeneous commodity and market entry is feasible. Marginal costs are unknown ex ante, that is, prior to entering the market. They become public knowledge before output choices are made. We show that uncertainty induces additional entry in market equilibrium and also raises the socially optimal number of firms. Since the first change dominates, the excessive entry distortion is aggravated. This prediction is robust to various extensions of the analytical setup. Furthermore, the welfare loss due to oligopoly tends to increase with uncertainty.

When to disclose the number of contestants: Theory and experimental evidence

This paper investigates whether it is optimal for a contest organizer to disclose the actual number of contestants for total effort optimization when entry in a contest is costly and endogenous. Our model suggests that in a Tullock (1980) contest, the answer depends on the convexity of the cost of effort function. Even though the equilibrium entry rate and rent dissipation are invariant to the disclosure policy, disclosing (concealing) the actual number of entrants can lead to a higher total effort when the cost function is concave (convex). To test these theoretical predictions, we design a 2×3 between-subjects laboratory experiment using lottery contests. We vary the disclosure policy (fully disclosed vs. fully concealed) in one dimension and the curvature of the cost of effort function (concave, linear, or convex) in the other dimension. Our results are largely consistent with the theoretical predictions regarding the optimal disclosure policy, despite the presence of moderate over-entry and over-exertion behavior that is commonly observed in experimental studies of contests.

The optimal allocation of prizes in contests with costly entry

Contestants often need to incur an opportunity cost to participate in the competition. In this paper, we accommodate costly entry and study the effort-maximizing prize allocation rule in a contest environment of all-pay auction with incomplete information as in Moldovanu and Sela (2001). As equilibrium entry can be stochastic, our analysis allows prize allocation rule to be contingent on the number of entrants. With free entry, Moldovanu and Sela establish the optimality of winner-take-all when effort cost function is linear or concave. Costly entry introduces a new trade-off between eliciting effort from entrants and encouraging entry of contestants, which might demand a more lenient optimal prize allocation rule. Surprisingly, we find that the optimality of winner-take-all is robust to costly entry when cost function is linear or concave. On the other hand, we provide examples to show that the new trade-off due to costly entry does make a difference to the optimal design when effort cost function is convex.

The Optimal Allocation of Prizes in Contests with Costly Entry

Contestants often need to incur an opportunity cost to participate in the competition. In this paper, we accommodate costly entry and study the effort-maximizing prize allocation rule in a contest environment of all-pay auction with incomplete information as in Moldovanu and Sela (2001). As equilibrium entry can be stochastic, our analysis allows prize allocation rule to be contingent on the number of entrants. With free entry, Moldovanu and Sela establish the optimality of winner-take-all when effort cost function is linear or concave. Costly entry introduces a new trade-off between eliciting effort from entrants and encouraging entry of contestants, which might demand a more lenient optimal prize allocation rule. Surprisingly, we find that the optimality of winner-take-all is robust to costly entry when cost function is linear or concave. On the other hand, we provide examples to show that the new trade-off due to costly entry does make a difference to the optimal design when effort cost function is convex.

ENHANCING EFFORT SUPPLY WITH PRIZE‐AUGMENTING ENTRY FEES: THEORY AND EXPERIMENTS

AbstractEntry fees are widely observed in contests. We study the effect of a prize‐augmenting entry fee on expected total effort in an all‐pay auction setting where the contestants' abilities are private information. An entry fee reduces equilibrium entry but can enhance the entrants' effort supply. Our theoretical model demonstrates that the optimal entry fee is strictly positive and finite. In a laboratory experiment, we empirically test the effect of entry fees on effort supply. Our results provide strong support for the notion that a principal can elicit higher effort using an appropriately set entry fee to augment the prize purse.

Competing first-price and second-price auctions

This paper theoretically investigates which auctions are selected by competing sellers when they can choose between first-price auctions and second-price auctions, and when homogeneously risk averse bidders endogenously enter one of the auctions. In order to study this, we first consider bidders’ entry decisions between exogenously given auctions. We find that there exists a symmetric entry equilibrium that is unique and is characterized by a mixed strategy, which depends on whether bidders exhibit constant, decreasing or increasing absolute risk aversion. In a next step, we endogenize the sellers’ choice of auctions. We show that competing sellers have a dominant strategy to select first-price auctions if bidders exhibit nondecreasing absolute risk aversion. If bidders exhibit decreasing absolute risk aversion, other equilibria may exist in which sellers select second-price auctions as well. For instance, we demonstrate that sellers may select second-price auctions if the distribution of private values is sufficiently skewed.

Leading the unwilling: Unilateral strategies to prevent arctic oil exploration

Arctic oil extraction is inconsistent with the 2 °C target. We study unilateral strategies by climate-concerned Arctic countries to deter extraction by others. Contradicting common theoretical assumptions about climate-change mitigation, our setting is one where countries may fundamentally disagree about whether mitigation by others is beneficial. This is because Arctic oil extraction requires specific R&D, hence entry by one country expands the extraction-technology market, decreasing costs for others. This means that, on the one hand, countries that extract Arctic oil gain if others do so as well. On the other hand, as countries may disagree about how harmful climate change is, they may disagree whether an equilibrium where all enter is better or worse than an equilibrium where all stay out. Less environmentally-concerned countries (preferring maximum entry) have a first-mover advantage but, because they rely on entry by others, entry in equilibrium is determined by the preferences of those who are moderately concerned about the environment. Furthermore, using a pooling strategy, an environmentally-concerned country can deter entry by credibly “pretending” to be environmentally adamant, and thus be expected to not follow. A rough calibration suggests a country like Norway, or prospects of a green future U.S. administration, could be pivotal in determining whether the Arctic will be explored.

Timing of entry and location/product differentiation

This research considers two alternative timing games, the precommitment game and the preemption game, where duopoly firms choose their respective timing of market entry and post‐entry profits are generated by price competition in a spatial model à la Hotelling (). We find that the time of first entry is increasing and the time of second entry is decreasing in location differentiation. The results are robust and valid both from an equilibrium analysis and from a welfare analysis. We also note that the difference in equilibrium entry times is too close from the viewpoint of social welfare.

Technological Evolution and Launch Timing: An Analysis of the Time-Quality Trade-Off Under Competition

In many technology-intensive industries, the quality of products offered by firms is constrained by the evolution of a core technology. Therefore, incorporating advanced technologies in new products entails delayed product introduction. However, an early launch of a new product provides a firm several enduring advantages such as larger market presence and greater availability of complements. In this work, we try to identify the strategic factors that drive launch-timing decisions under competition. Specifically, we model the entry timing decisions made by two competing firms that face different technological trajectories. By endogenizing the competitive environment as an outcome of entry decisions, we characterize equilibria in the Product Launch Game under a variety of market conditions. We find that competing firms often take different roles as early leaders or technology leaders by entering a market at different times; this allows them to utilize entry timing as an additional dimension to differentiate themselves from their rival. We also analyze the impact of technological trajectories and market factors such as network effects and growth potential on the profitability of various entry strategies. We show that these factors can affect a firm's equilibrium profits in a counter-intuitive fashion. One of our interesting conclusions is that the level of competition in an industry moderates the significance of different factors that influence equilibrium entry strategies. As a result, firms that fail to understand the extent of competition might emphasize the wrong dimensions in making entry decisions.

Endogenous number of firms, horizontal concentration and heterogeneity of firms—A note

We re-examine implications of heterogeneity of firms under a Cournot setting on free entry equilibria concerning the number of firms. Heterogeneity reduces the number of firms in equilibrium—the larger the cost asymmetries, the smaller the free entry equilibrium number of firms in an industry.

Exports versus FDI in Smith-Motta framework

In this paper we study the choice between exporting and foreign direct investment (FDI) in the Smith-Motta duopoly framework. First, we identify the conditions necessary for exporting and FDI, depending on the costs of exporting and the cost of foreign investment. Then, we discuss various proximity-concentration tradeoffs. Finally, we demonstrate that six possible types of equilibriums may emerge depending on various combinations of the key parameters of the model. These equilibriums include: a monopoly FDI equilibrium, a monopoly exporting equilibrium, a domestic monopoly equilibrium, a duopoly FDI equilibrium, a duopoly exporting equilibrium, and no entry equilibrium.

On the robustness and strategic implications of a parsimonious advertising – inventory competitive model with extensions to pricing competition

Using a market share attraction structure of advertising competition, this research introduces first, a parsimonious inventory-advertising model for which competition is limited to two symmetric firms thus obtaining its related comparative statics. Following a supermodular game approach, the derived comparative statics remain robust upon considering non-dominant firms (each with a market share of less than 50%) competing in an asymmetric oligopoly of N rivals where each firm controls the inventory/advertising decision variables. Furthermore, changes in model parameters are investigated in terms of their relative impact on equilibrium measures. In this regard, the findings indicate that for the analyzed model, the marketing parameters possess much more influence on the equilibrium measures than the operations parameters. The generalization appears applicable to both non-dominated oligopolies as well as dominated oligopolies (where one firm has a market share equal to or greater than 50%) where each firm controls the inventory/advertising decision variables in addition to price. However, changes in shift parameters elicit a response from the dominant firm which will differ from its non-dominant rivals for products and services. Additionally, while the literature shows that the non-dominant firm will pursue a defensive strategy of decreasing both the equilibrium price and the amount of equilibrium advertising in response to competitive entry, our findings show that results for a fixed market potential may not continue to be robust once inclusion of the operations variables of order quantity are considered. Finally, the study explores the implications of the free - entry equilibrium for which the number of firms in the industry is determined endogenously.

Non-monotonic network effects and market entry

The simple circular model of horizontal product differentiation, in which firms compete in price, is characterized by excessive firm entry in equilibrium. When non-monotonic network effects are present, this result no longer holds. If consumers differ in their optimal number of other consumers choosing their same good, entry in equilibrium can be insufficient.

Non-Monotonic Network Effects and Market Entry

The simple circular model of horizontal product differentiation, where firms compete in price, implies an excessive entry of firms in equilibrium. When non-monotonic network effects are present, this result no longer holds. If consumers differ in their optimal number of other consumers choosing the same good, entry in equilibrium can be insufficient.