Optimal firm growth under the threat of entry

Peter Kort and Stefan Wrzaczek

European Journal of Operational Research, 2015, vol. 246, issue 1, 281-292

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.

Keywords: Economics; Game theory; Dynamic programming (search for similar items in EconPapers)
JEL-codes: C73 D92 L13 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:246:y:2015:i:1:p:281-292

DOI: 10.1016/j.ejor.2015.04.030

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