Download Entry and Exit Decisions

Multistage Games
• Many economic situations exist in which
one agent acts before the other
• Decision makers must consider the
manner in which their rival will respond to
their decision
• Decision makers should only consider
credible responses
Pricing Strategies
• Attempt to discourage entry by charging a
low price
-low price must somehow convey bad news
to potential entrants about their post-entry
profitability in the market
-potential entrants must believe that the low
price will persist after entry
• Low price in second period is not
credible—so the entrant should enter
• Is there any way to use price to deter
entry?
-low price can be signal of low costs
• What about signaling aggressive pricing
behaviour?
-would have to keep it up for ever—not
profitable
Research and Development and
New Technology Adoption
• Three Stages of Technological Progress:
-basic research
-applied research
-diffusion (adoption, imitation)
• Two types of innovations:
-product (create new goods/services)
-process (reduce cost of producing)
Incentive to innovate and market
structure
• Replacement effect:
-monopolist’s pre-invention profits act as a disincentive to
innovate
• Efficiency effect:
-benefit from being a monopolist as compared to 1 of 2
duopolists > than benefit from being 1 of 2 duopolists as
compared to out of the industry
-depends on level of uncertainty monopolist has about
likelihood potential entrant enters (if less likely,
monopolist has less incentive to innovate)
-depends on speed of innovation (if drastic, potential
entrant has as much incentive as monopolist
Technology adoption
• If alone in market, delay adoption until
demand is high enough and adoption
costs are low enough
• But what if more than one firm?
• Preemptive equilibrium:
-consider a process innovation and Bertrand
competition
-after one firm has adopted, other may delay
(never pays to be second)
• Delayed adoption equilibrium:
-consider a product innovation such that
consumers will switch to the innovated product
-this triggers immediate imitation in order not to
loose customer base
-if rival can be observed, equilibrium is for both
firms to adopt the strategy “adopt if I see my rival
adopt”, and so neither ever adopts
-if rival can’t be observed, equilibrium is for both to
adopt immediately