Optimal firm growth under the threat of entry

Peter Kort, S. Wrzaczek

Research output: Contribution to journalArticleScientificpeer-review

Abstract

The paper studies the incumbent-entrant problem in a fully dynamic setting. We find that under an open-loop information structure the incumbent anticipates entry by overinvesting, whereas in the Markov perfect equilibrium the incumbent slightly underinvests in the period before the entry. The entry cost level where entry accommodation passes into entry deterrence is lower in the Markov perfect equilibrium. Further we find that the incumbent’s capital stock level needed to deter entry is hump shaped as a function of the entry time, whereas the corresponding entry cost, where the entrant is indifferent between entry and non-entry, is U-shaped.
Original languageEnglish
Pages (from-to)281-292
Number of pages11
JournalEuropean Journal of Operational Research
Volume246
Issue number1
DOIs
Publication statusPublished - 1 Oct 2015

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Information Structure
Costs
Threat
Firm growth
Incumbents
Markov perfect equilibrium
Entry costs
Capital stock
Information structure
Entry deterrence
Accommodation

Keywords

  • Economics
  • Game theory
  • Dynamic programming

Cite this

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Optimal firm growth under the threat of entry. / Kort, Peter; Wrzaczek, S.

In: European Journal of Operational Research, Vol. 246, No. 1, 01.10.2015, p. 281-292.

Research output: Contribution to journalArticleScientificpeer-review

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