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3594. Optimal entry deterrence under uncertainty

Invited abstract in session MB-33: Dynamics of the Firm I, stream Optimal Control Theory and Applications.

Monday, 10:30-12:00
Room: 42 (building: 303A)

Authors (first author is the speaker)

1. Peter Kort
Tilburg University
2. Richard Hartl
Business Decisions & Analytics, University of Vienna
3. Stefan Wrzaczek
Economic Frontiers, Institute for Applied Systems Analysis (IIASA)

Abstract

The objective of this paper is to study an incumbent-entrant model
under uncertainty. The entrant knows the realization of the random vari-
able(s) before it makes its decision on entry and eventual capacity choice.
So all the uncertainty is on the incumbent's side. The sources of uncertainty consider the characteristics of the entrant's product and the entry
cost the entrant needs to incur before becoming active. We know from the
literature that the incumbent-entrant setup could result in three di¤erent
outcomes: blockaded entry, i.e., the incumbent behave like a monopolist
and the entrant does not enter, deterred entry, i.e., the incumbent overinvests to make the market unprofitable for the entrant, and accommodated
entry. The main result from our work is that under uncertainty there can
be four outcomes: apart from blockaded entry and accommodated entry,
it can be either 100% entry deterrence or entry deterrence with a certain
probability.

Keywords

Status: accepted

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