Welfare Implications of Sequential Entry with Heterogeneous Firms

Hattori, Keisuke and Yamada, Mai (2020): Welfare Implications of Sequential Entry with Heterogeneous Firms.

Abstract

Does free entry result in the socially preferred order of market entry for heterogeneous firms? This paper examines the welfare effects of sequential market entry by using a simple entry-deterrence model with heterogeneities in fixed and variable production costs among firms. In particular, we consider the question of whether a less or more efficient firm should be the first entrant into a new market from a welfare perspective. We show that the order of entry whereby a more efficient firm enters the market first may lead to welfare loss due to the less aggressive entry deterrence efforts made by the first entrant. Our findings have important policy implications with regard to the welfare consequences of free entry markets and the privatization of public monopolies through auctions.

• Item Type: MPRA Paper
• Language: English
• Keywords: Entry deterrence; Sequential entry; Firm heterogeneity
• Subjects: D - Microeconomics > D4 - Market Structure, Pricing, and Design > D42 - Monopoly; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L12 - Monopoly ; Monopolization Strategies

References

Aghion, P. and Bolton, P. (1987) Contracts as a barrier to entry. American Economic Review 77(3), 388-401.

Aguirregabiria, V. and Ho, CY. (2010) A dynamic game of airline network competition: Hub-and-spoke networks and entry deterrence, International Journal of Industrial Organization 28, 377-382.

Anderson, S.P. and Engers, M. (1994) Strategic investment and timing of entry. International Economic Review 35(4), 833-853.

Argenziano, R. and Schmidt-Dengler, P. (2012) Inefficient entry order in preemption games. Journal of Mathematical Economics 48, 445-460.

Ashiya, M. (2000) Weak entrants are welcome. International Journal of Industrial Organization 18, 975-984.

Bain, J.S. (1956) Barriers to new competition. Harvard University Press, Cambridge, MA.

Belleflamme, P. and Peitz, M. (2015) Industrial Organization: Markets and Strategies. Cambridge University Press.

Berg, A. and Berg, E. (1997) Methods of privatization. Journal of International Affairs 50(2), 357-390.

Bernheim, B.D. (1984) Strategic deterrence of sequential entry into an industry. RAND Journal of Economics 15(1), 1-11.

Berry, S.T. (1992) Estimation of a model of entry in the airline industry. Econometrica, 60, 889-917.

Bognetti, G. and Obermann, G. (2008) Liberalization and privatization of public utilities: Origins of the debate, current issues and challengers for the future. Annals of Public and Cooperative Economics 79(3), 461-485.

Bokhari, F. and Yan, W. (2020) Product line extensions under the threat of entry: evidence from the UK pharmaceuticals market No. 2020-04. Centre for Competition Policy, University of East Anglia, Norwich, UK.

Cabral, L.M.B. and Ross, T.W. (2008) Are sunk costs a barrier to entry? Journal of Economics & Management Strategy 17(1), 97-112.

Cookson, J.A. (2018) Anticipated entry and entry deterrence: evidence from the American casino industry. Management Science 64(5), 2325-2344.

Dafny, L.S. (2005) Games hospitals play: entry deterrence in hospital procedure markets. Journal of Economics & Management Strategy 14(3), 513-542.

Dixit, A. (1980) The role of investment in entry-deterrence. Economic Journal 90(357), 95-106.

Fudenberg, D. and Tirole, J. (1984) The fat-cat effect, the puppy-dog ploy, and the lean and hungry look. American Economic Review 74(2), 361-366.

Lahiri, S. and Ono, Y. (1988) Helping minor firms reduces welfare. Economic Journal 98, 1199-1202.

Lieberman, M.B. (1987) Excess capacity as a barrier to entry: An empirical appraisal. Journal of Industrial Economics 35(4), 607-627.

Makadok, R. and Ross, D.G. (2018) Losing by winning: the danger zone of adverse competitor replacement. Strategic Management Journal 39(7), 1990-2013.

Mankiw, N.G. and Whinston, M.D. (1986) Free entry and social inefficiency. Rand Journal of Economics 17(1), 48-58.

Mukherjee, A. (2012) Social efficiency of entry with market leaders. Journal of Economics and Management Strategy 21(2), 431-444.

Mukherjee, A. and Ray, A. (2014) Entry, profit and welfare under asymmetric R&D costs. The Manchester School 82(3), 284-295.

Neven, D.J. (1989) Strategic entry deterrence: recent developments in the economics of industry. Journal of economics surveys 3(3), 213-233.

Pawlina, G. and Kort, P.M. (2006) Real options in an asymmetric duopoly: who benefits from your competitive disadvantage?. Journal of Economics & Management Strategy 15(1), 1-35.

Quint, D. and Einav, L. (2005) Efficient entry. Economics Letters 88(2), 278-283.

Riordan, M.H. (1992) Regulation and preemptive technology adoption. RAND Journal of Economics 27(3), 334-349.

Salant, S.W., and Shaffer, G. (1999) Unequal treatment of identical agents in Cournot equilibrium. American Economic Review 89, 585-604.

Scott Morton, F.M. (1999) Entry decisions in the generic pharmaceutical industry. RAND Journal of Economics 30(3), 421-440.

Spence, M. (1977) Entry, investment and oligopolistic pricing. Bell Journal of Economics 8(2), 1-19.

Spulber, D.F. (1981) Capacity, output and sequential entry. American Economic Review 71(3), 503-514.

Sylos-Labini, P. (1962) Oligopoly and technical progress. Harvard University Press, Cambridge.

Tirole, J. (1988) The Theory of Industrial Organization, MIT Press.

Uzunca, B. and Cassiman, B. (2020) Entry diversion: deterrence by diverting submarket entry. Strategic Management Journal, 1-37.

Vickers, J. and Yarrow, G. (1991) Economic Perspectives on Privatization. Journal of Economic Perspectives, 5(2), 111-132.

Vives, X. (1988) Sequential entry, industry structure and welfare. European Economic Review 32, 1671-1687.

Wilson, R. (1992) Strategic models of entry deterrence. Handbook of Game Theory volume 1. 305-329.