Entry deterrence and hidden competition

Maria Lavrutich, Kuno Huisman, Peter Kort

Research output: Contribution to journalArticleScientificpeer-review

Abstract

This paper studies strategic investment behavior of firms facing an uncertain demand in a duopoly setting. Firms choose both investment timing and the capacity level while facing additional uncertainty about market participants, which is introduced via the concept of hidden competition. We focus on the analysis of possible strategies of the market leader in terms of its capacity choice and on the influence of hidden competition on these strategies.

We show that due to hidden competition the follower is more eager to invest. As a result, an entry deterrence strategy of the leader becomes more costly, and it can only be implemented for smaller market size, leaving additional room for entry accommodation. The leader has incentives to prevent entry of the hidden competitor stimulating simultaneous investment if the hidden firm has a large capacity, and has more incentives to apply entry deterrence in the complementary case of a small capacity of the hidden player. In the first case overinvestment aimed to deter the follower's entry does not occur for a wide range of parameters values.
Original languageEnglish
Pages (from-to)409-435
JournalJournal of Economic Dynamics and Control
Volume69
DOIs
Publication statusPublished - Aug 2016

Fingerprint

Incentives
Timing
Choose
Uncertainty
Entry deterrence
Range of data
Market
Strategy
Business
Follower
Influence
Demand
Concepts
Investment behavior
Uncertain demand
Investment timing
Competitors
Strategic investment
Market size
Overinvestment

Keywords

  • real options
  • investment under uncertainty
  • entry deterrence/accommodation
  • duopoly
  • capacity choice

Cite this

@article{e3c544df330b4155a7f0b66bba19c613,
title = "Entry deterrence and hidden competition",
abstract = "This paper studies strategic investment behavior of firms facing an uncertain demand in a duopoly setting. Firms choose both investment timing and the capacity level while facing additional uncertainty about market participants, which is introduced via the concept of hidden competition. We focus on the analysis of possible strategies of the market leader in terms of its capacity choice and on the influence of hidden competition on these strategies.We show that due to hidden competition the follower is more eager to invest. As a result, an entry deterrence strategy of the leader becomes more costly, and it can only be implemented for smaller market size, leaving additional room for entry accommodation. The leader has incentives to prevent entry of the hidden competitor stimulating simultaneous investment if the hidden firm has a large capacity, and has more incentives to apply entry deterrence in the complementary case of a small capacity of the hidden player. In the first case overinvestment aimed to deter the follower's entry does not occur for a wide range of parameters values.",
keywords = "real options, investment under uncertainty, entry deterrence/accommodation, duopoly, capacity choice",
author = "Maria Lavrutich and Kuno Huisman and Peter Kort",
year = "2016",
month = "8",
doi = "doi:10.1016/j.jedc.2016.05.012",
language = "English",
volume = "69",
pages = "409--435",
journal = "Journal of Economic Dynamics and Control",
issn = "0165-1889",
publisher = "Elsevier Science BV",

}

Entry deterrence and hidden competition. / Lavrutich, Maria; Huisman, Kuno; Kort, Peter.

In: Journal of Economic Dynamics and Control, Vol. 69, 08.2016, p. 409-435.

Research output: Contribution to journalArticleScientificpeer-review

TY - JOUR

T1 - Entry deterrence and hidden competition

AU - Lavrutich, Maria

AU - Huisman, Kuno

AU - Kort, Peter

PY - 2016/8

Y1 - 2016/8

N2 - This paper studies strategic investment behavior of firms facing an uncertain demand in a duopoly setting. Firms choose both investment timing and the capacity level while facing additional uncertainty about market participants, which is introduced via the concept of hidden competition. We focus on the analysis of possible strategies of the market leader in terms of its capacity choice and on the influence of hidden competition on these strategies.We show that due to hidden competition the follower is more eager to invest. As a result, an entry deterrence strategy of the leader becomes more costly, and it can only be implemented for smaller market size, leaving additional room for entry accommodation. The leader has incentives to prevent entry of the hidden competitor stimulating simultaneous investment if the hidden firm has a large capacity, and has more incentives to apply entry deterrence in the complementary case of a small capacity of the hidden player. In the first case overinvestment aimed to deter the follower's entry does not occur for a wide range of parameters values.

AB - This paper studies strategic investment behavior of firms facing an uncertain demand in a duopoly setting. Firms choose both investment timing and the capacity level while facing additional uncertainty about market participants, which is introduced via the concept of hidden competition. We focus on the analysis of possible strategies of the market leader in terms of its capacity choice and on the influence of hidden competition on these strategies.We show that due to hidden competition the follower is more eager to invest. As a result, an entry deterrence strategy of the leader becomes more costly, and it can only be implemented for smaller market size, leaving additional room for entry accommodation. The leader has incentives to prevent entry of the hidden competitor stimulating simultaneous investment if the hidden firm has a large capacity, and has more incentives to apply entry deterrence in the complementary case of a small capacity of the hidden player. In the first case overinvestment aimed to deter the follower's entry does not occur for a wide range of parameters values.

KW - real options

KW - investment under uncertainty

KW - entry deterrence/accommodation

KW - duopoly

KW - capacity choice

U2 - doi:10.1016/j.jedc.2016.05.012

DO - doi:10.1016/j.jedc.2016.05.012

M3 - Article

VL - 69

SP - 409

EP - 435

JO - Journal of Economic Dynamics and Control

JF - Journal of Economic Dynamics and Control

SN - 0165-1889

ER -