Entry How is an industry’s market structure determined? Deterrence or accommodation 4820–6
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4820–6 Entry Geir B. Asheim Entry Introduction Deterrence or accommodation 4820–6 Two-stage competition Deterring entry Accommod. entry Geir B. Asheim Examples Department of Economics, University of Oslo ECON4820 Spring 2010 Last modified: 2010.02.23 How is an industry’s market structure determined? Number of firms, market shares, etc. 4820–6 Entry Geir B. Asheim Entry until profit equals zero But what about all the positive profits we observe? Introduction Deterring/ accommod. entry Outline Two-stage competition Deterring entry Accommod. entry Examples Regulation But what about deregulation over the last decades? Technology Economies of scale → natural monopoly Vertical product differentiation Natural oligopoly The established (incumbent) firm’s strategic advantage Three strategies when confronted with an entry threat 4820–6 Entry Geir B. Asheim Introduction Deterring/ accommod. entry Outline Two-stage competition Deterring entry Accommod. entry Blockading entry “Business as usual” Deterring entry Established firms act in such a way that entry is sufficiently unattractive Examples Accommodating entry Outline 4820–6 Entry Geir B. Asheim Introduction Deterring/ accommod. entry Outline Two-stage competition Deterring entry Two-stage competition Deterring entry Accommodating entry Accommod. entry Examples Examples Two-stage competition Strategic commitment to affect future competition 4820–6 Entry Geir B. Asheim Structure: (1) Firm 1 makes strategic investment K . Observable. Introduction Two-stage competition Taxonomy Deterring entry Accommod. entry (2) Firms 1 and 2 play some oligopoly game, choosing x1 and x2 Payoffs: Π1 (x1 , x2 , K ) and Π2 (x1 , x2 ) Actions are “aggressive”: Π12 (x1 , x2 , K ) < 0 and Π21 (x1 , x2 ) < 0. Examples Best response functions: R1 (x2 , K ) and R2 (x1 ). Assume unique Nash equilibrium: (x1∗ (K ), x2∗ (K )). Assume sufficient differentiability. Behavior of the best response functions 4820–6 Entry Π11 (R1 (x2 , K ), x2 , K ) ≡ 0 Geir B. Asheim Π111 (x1 , x2 , K )dx1 + Π112 (x1 , x2 , K )dx2 + Π11K (x1 , x2 , K )dK = 0 Introduction ∂R1 Π112 (x1 , x2 , K ) =− 1 ∂x2 Π11 (x1 , x2 , K ) Two-stage competition Taxonomy Deterring entry Π11K (x1 , x2 , K ) ∂R1 =− 1 ∂K Π11 (x1 , x2 , K ) Accommod. entry Examples Π22 (x1 , R2 (x1 )) ≡ 0 Π221 (x1 , x2 )dx1 + Π222 (x1 , x2 )dx2 = 0 dR2 Π221 (x1 , x2 ) =− 2 dx1 Π22 (x1 , x2 ) Affecting own equilibrium behavior through strategic commitment 4820–6 Entry Geir B. Asheim Identity: x1∗ ≡ R1 (R2 (x1∗ ), K ) Introduction dx1∗ = Two-stage competition Taxonomy Deterring entry Accommod. entry Examples ∂R1 dR2 ∗ ∂R1 dx + dK ∂x2 dx1 1 ∂K dR2 ∂R1 1− dx1 ∂x2 dx1∗ = ∂R1 dK ∂K ∂R1 dx1∗ ∂K = 2 ∂R1 dK 1 − dR dx1 ∂x2 Affecting opponent equilibrium behavior through strategic commitment 4820–6 Entry Geir B. Asheim Introduction Two-stage competition Taxonomy Deterring entry Accommod. entry Examples Identity: x2∗ ≡ R2 (R1 (x2∗ , K )) dR2 dx2∗ = dx1 dR2 ∂R1 1− dx1 ∂x2 dx2∗ dK = ∂R1 ∗ ∂R1 dx + dK ∂x2 2 ∂K dR2 dx1 dx2∗ = 1 dR2 ∂R1 dK dx1 ∂K ∂R1 ∂K 2 ∂R1 − dR dx1 ∂x2 Taxonomy of business strategies 4820–6 Entry Geir B. Asheim Introduction Two-stage competition dx1∗ dK dx2∗ dK = ∂R1 ∂K dR ∂R 1− dx 2 ∂x 1 1 2 = dR2 dx1 ∂R1 ∂K dR ∂R 1− dx 2 ∂x 1 1 2 Taxonomy Deterring entry Accommod. entry ∂R1 (·) ∂K >0 Examples ∂R1 (·) ∂K <0 Strategic substitutes: Strategic complements: dR2 (·) dx1 dR2 (·) dx1 dx1∗ (K ) dK <0 >0 >0 dx1∗ (K ) dK >0 dx2∗ (K ) dK <0 dx2∗ (K ) dK >0 dx1∗ (K ) dK <0 dx1∗ (K ) dK <0 dx2∗ (K ) dK >0 dx2∗ (K ) dK <0 Deterring entry 4820–6 Entry Geir B. Asheim Introduction Firm 1 must push firm 2’s profit under its entry cost. Two-stage competition Deterring entry Accommod. entry Examples dΠ2 (x1∗ (K ), x2∗ (K )) = dK dx1∗ dK Π21 Strategic effect dx2∗ + dK Π22 =0 Comparison: K chosen without potential competition Deterring entry 4820–6 Entry Geir B. Asheim dx1∗ dK = ∂R1 ∂K dR ∂R 1− dx 2 ∂x 1 1 2 To Deter Entry Introduction Strategic substitutes: Strategic complements: Two-stage competition dR2 (·) dx1 dR2 (·) dx1 Deterring entry Accommod. entry ∂R1 (·) ∂K Examples ∂R1 (·) ∂K >0 <0 dx1∗ (K ) dK > 0 ΔK > 0 Top Dog >0 dx1∗ (K ) dK > 0 ΔK > 0 Top Dog big & strong to look big & strong to look tough & aggressive tough & aggressive dx1∗ (K ) dK < 0 ΔK < 0 dx1∗ (K ) dK < 0 ΔK < 0 < 0 Mean & Hungry Look Mean & Hungry Look small & firm to look small & firm to look tough & aggressive tough & aggressive Accommodating entry 4820–6 Entry Geir B. Asheim Firm 1 must get firm 2 to behave less aggressively. Introduction Two-stage competition Deterring entry ∗ ∗ dΠ1 (x1∗ (K ), x2∗ (K ), K ) 1 dx1 1 dx2 0= = Π1 + Π2 + Π1K − 1 dK dK dK =0 Accommod. entry Examples dx2∗ dK Π12 Strategic effect + Π1K = 1 Cond if K simulat. Comparison: K chosen simultaneously with x1 and x2 Accommodating entry 4820–6 Entry Geir B. Asheim dx2∗ dK = dR2 dx1 ∂R1 ∂K dR ∂R 1− dx 2 ∂x 1 1 2 To Accommodate Entry Introduction Strategic substitutes: Strategic complements: Two-stage competition dR2 (·) dx1 dR2 (·) dx1 Deterring entry Accommod. entry ∂R1 (·) ∂K Examples ∂R1 (·) ∂K >0 <0 dx2∗ (K ) dK < 0 ΔK > 0 Top Dog >0 dx2∗ (K ) dK > 0 ΔK < 0 Puppy Dog big & strong to look small & weak to look tough & aggressive soft & inoffensive dx2∗ (K ) dK > 0 ΔK < 0 < 0 Mean & Hungry Look dx2∗ (K ) dK < 0 ΔK > 0 Fat Cat small & firm to look fat & mellow to look tough & aggressive soft & inoffensive Examples 4820–6 Entry Geir B. Asheim Cournot competition Top dog to deter entry Top dog to accommodate entry Introduction Two-stage competition Deterring entry Accommod. entry Examples Cournot competition Bertrand competition R&D competition Persuasive advertising Bertrand competition Top dog to deter entry Puppy dog to accommodate entry R&D competition Mean & hungry look to deter entry Mean & hungry look to accommodate entry Persuasive advertising Mean & hungry look to deter entry Fat cat to accommodate entry Cournot competition 4820–6 Entry Geir B. Asheim Increased K decreases 1’s marginal cost xi : i’s quantity. Actions are aggressive. Introduction Two-stage competition Π11K >0 ⇒ Deterring entry Accommod. entry Examples ∂R1 >0 ∂K dx1∗ >0 dK ⇒ Increased K leads to own aggressiveness. Top dog to deter entry. Cournot competition Bertrand competition R&D competition Persuasive advertising Π221 <0 ⇒ dR2 <0 dx1 ⇒ dx2∗ <0 dK Own aggressiveness softens opponent. Top dog to accommodate entry. Bertrand competition 4820–6 Entry Geir B. Asheim Increased K decreases 1’s marginal cost xi = 1 pi . Actions are aggressive. Introduction Two-stage competition Π11K >0 ⇒ Deterring entry Accommod. entry Examples Cournot competition Bertrand competition R&D competition Persuasive advertising ∂R1 >0 ∂K dx1∗ >0 dK ⇒ Increased K leads to own aggressiveness. Top dog to deter entry. Π221 >0 ⇒ dR2 >0 dx1 ⇒ dx2∗ >0 dK Own aggressiveness makes opponent more aggressive. Puppy dog to accommodate entry. R&D competition 4820–6 Entry Geir B. Asheim Introduction Two-stage competition Deterring entry Accommod. entry Increased K decreases 1’s MC in the existing technology. xi : Resources used on R&D. New technology leads to lower MC. μi (xi ): Probability for new technology (μi (0) = ∞, μi > 0, μi < 0). V1 = V2 = 0 if both firms obtain new technology Vi = V m (c) & Vj = 0 if only firm i obtains new technology V1 = V m (c̄(K )) & V2 = 0 if no firm obtains new technology Π11K <0 ⇒ Examples Cournot competition Bertrand competition R&D competition Persuasive advertising ∂R1 <0 ∂K ⇒ dx1∗ <0 dK Increased K reduces own aggressiveness. Lean & hungry look to deter entry. Π221 <0 ⇒ dR2 <0 dx1 ⇒ dx2∗ >0 dK Own aggressiveness softens opponent. Lean & hungry look to accommodate entry. Persuasive advertising 4820–6 Entry Geir B. Asheim Introduction Increased K increases 1’s goodwill K : Share of customers reached in stage 1. Loyal in stage 2. xi = p1i . Actions are aggressive. Two-stage competition Deterring entry Accommod. entry Examples Cournot competition Bertrand competition R&D competition Persuasive advertising Π11K <0 ⇒ ∂R1 <0 ∂K ⇒ dx1∗ <0 dK Increased K reduces own aggressiveness. Lean & hungry look to deter entry. Π221 >0 ⇒ dR2 >0 dx1 ⇒ dx2∗ <0 dK Own aggressiveness makes opponent more aggressive. Fat cat to accommodate entry.
