Working Paper: CEPR ID: DP1729
Authors: Luis M. B. Cabral
Abstract: Frequently, aspiring entrants have only limited information about their potential rivals? entry decisions. As a result, the outcome of the entry game may be that more firms enter than the market can sustain; or, at least, that unnecessary entry investments are made. We refer to these outcomes as ?entry mistakes?. We consider two models of non-coordinated entry. In these models, entry mistakes occur because of lags in observing rivals? entry decisions (grab-the-dollar entry) or because entry investments take time (war-of-attrition entry). The wide-body aircraft industry in the late 1960s is presented as supporting evidence for the models? assumptions. We also discuss the welfare implications of non-coordinated free entry. Both models predict that entry incentives are excessive (resp. insufficient) when duopoly profits are high (resp. low). If entry costs are high, however, entry incentives are excessive under war-of-attrition entry but insufficient under grab-the-dollar entry.
Keywords: entry; entry regulation; welfare; aircraft manufacturing
JEL Codes: L1; L6; L9
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lack of information (D89) | entry mistakes (Y20) |
| length of observation lags (C41) | entry mistakes (Y20) |
| high entry costs (L11) | excessive incentives for entry (war of attrition model) (L13) |
| high entry costs (L11) | insufficient incentives for entry (grab-the-dollar model) (D43) |
| profitability of duopoly outcomes (D43) | entry incentives (L26) |
| costs associated with entry (L11) | entry incentives (L26) |