DP1729 Entry Mistakes

Author(s): Luís M B Cabral

Publication Date: November 1997

Keyword(s): aircraft manufacturing , Entry , entry regulation , Welfare

JEL(s): L1 , L6 , L9

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP1729.asp

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.