Entry and Entry Deterrence Under Uncertainty: Three Essays on Firm Behavior Under Asymmetric Information.

Abstract

Three essays examine the impact of asymmetric information on firm behavior in markets threatened by entry. Some new results on the theory of the firm are derived for both duopoly and perfectly competitive market structures. In the first two essays, the market structure considered is that of duopoly. Under the assumption that the entrant has private information on its own technology, the form of an optimal entry deterrence game is derived endogenously for an environment where the incumbent firm is assumed to choose among a large class of extensive form games. An analysis of the post entry equilibrium in this optimal game leads to a number of important results on duopoly theory and entry deterrence. It is shown that when the incumbent is acting under incomplete information, it is often unwilling to make irrevocable investments which could deter entry. When entry does occur, the model generates a non-cooperative equilibrium in which each firm earns profits which exceed those earned in a naive Cournot game. Finally, the analysis demonstrates the impact of incomplete information in preventing firms from obtaining collusive outcomes. In situations where new entrants have private information on their technology, the post-entry equilibrium which results is always one which leads to improvements in consumer welfare. This result holds even when binding agreements between firms are possible. In the third essay, the impact of asymmetric information on long run equilibrium in perfectly competitive industries is examined. It is shown that when firms are better informed in the short run than in the long run, a number of the st and ard long run efficiency results found in the theory of the competitive firm no longer hold. However, under certain conditions, perfect competition does lead to the achievement of a type of second best efficiency. The analysis also reexamines some st and ard comparative static results including the shape of the industry supply curve and the impact of increasing risk on long run competitive equilibrium.