Monday, January 23, 2012
Posted by D. Daniel Sokol
Francis Bloch (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X), Simona Fabrizi (Massey University - SIERC) and Steffen Lippert (University of Otago - Department of Economics) address Learning and Collusion in New Markets with Uncertain Entry Costs.
ABSTRACT: This paper analyzes an entry timing game with uncertain entry costs. Two firms receive costless signals about the cost of a new project and decide when to invest. We characterize the equilibrium of the investment timing game with private and public signals. We show that competition leads the two firms to invest too early and analyze collusion schemes whereby one firm prevents the other firm from entering the market. We show that, in the efficient collusion scheme, the active firm must transfer a large part of the surplus to the inactive firm in order to limit preemption.