Technological leadership and persistence of monopoly under endogenous entry: Static versus dynamic analysis

Abstract

a b s t r a c tWe build a dynamic oligopoly model with endogenous entry in which a particular firm (leader) invests in an innovation process, facing the subsequent entry of other firms (followers). We identify conditions that make it optimal for the leader in the initial oligopoly situation to undertake pre-emptive R&D investment (strategic predation) eventually resulting in the elimination of all followers. Compared to a static model, the dynamic one provides new insights into the leader's intertemporal investment choice, its optimal decision making, and the dynamics of the market structure over time. We also contrast the leader's investment decisions with those of the social planner.

Equilibrium Principal‐Agent Contracts: Competition and R&D Incentives

“…Etro () has analyzed optimal unilateral screening contracts in markets with endogenous entry, showing that a firm would always gain from committing to aggressive incentive contracts (with extra effort required from all types) to limit entry and gain market shares over the competitors. Although that model, following the analysis of leadership with endogenous market structures (as in Etro, or Kováč et al., ), neglected contract competition, a similar outcome is likely to emerge also in the present context. Finally, one could investigate welfare analysis in our more complex environment…”

Research and Development Cooperatives and Market Collusion: A Global Dynamic Approach

“…The related literature [24,[27][28][29][30] has not considered initial marginal cost levels that exceed the choke price nor has it carried out a global analysis. In all these papers, any of the initial (permissible) technologies will be developed to full materialization; technologies that are only developed under specific regimes (i.e., product market collusion) remain hidden.…”

The Theory of Endogenous Market Structures

“…What appear to be predatory strategies by market leaders can actually be welfare improving as long as the entry of followers is endogenous: for instance, these are the cases analyzed by Creane and Konishi () on unilateral technology transfers, by Kováč et al . () on cost reducing investments that limit entry and Etro () on bundling of a primary good sold in monopoly with a secondary one sold in competition. Ino and Matsumura () have shown that, contrary to common wisdom, leadership by one firm induces always beneficial concentration in markets with homogenous goods and endogenous entry, in the sense that it increases both the Herfindahl‐Hirschman Index of concentration and welfare.…”