Working Paper: CEPR ID: DP10009
Authors: Yossi Spiegel; Konrad Stahl
Abstract: We consider the interaction between an incumbent firm and a potential entrant, and examine how this interaction is affected by demand fluctuations. Our model gives rise to procyclical entry, prices, and price-cost margins, although the average price in the market can be countercyclical if the entrant is the first mover, and capacity utilization can be either pro- or countercyclical if the incumbent is the first mover. Moreover, our results show that entry deterrence by the incumbent firm can either amplify or dampen the effect of demand fluctuations on prices, price-cost margins, and capacity utilization.
Keywords: business cycle; entry; entry deterrence; price competition
JEL Codes: D43; L41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| entry prices (P22) | demand fluctuations (E32) |
| price-cost margins (D40) | demand fluctuations (E32) |
| demand fluctuations (E32) | entry prices (P22) |
| demand fluctuations (E32) | price-cost margins (D40) |
| entry deterrence by incumbent (L49) | demand fluctuations on prices (E39) |
| first mover (entrant) (L26) | average market price (D41) |
| capacity utilization of incumbent (L97) | demand fluctuations (E32) |