Thursday, September 4, 2014
Yossi Spiegel, Tel Aviv University - The Leon Recanati Graduate School of Business Administration and Konrad O. Stahl, University of Mannheim - Department of Economics; Centre for Economic Policy Research (CEPR) discuss Industry Structure and Pricing Over the Business Cycle.
ABSTRACT: We consider the interaction between an incumbent firm and a potential entrant, and examine how this interaction is affected by demand fluctuations. Our model gives rise to procyclical entry, prices, and price-cost margins, although the average price in the market can be countercyclical if the entrant is a first mover, and capacity utilization can be either pro- or countercyclical if the incumbent is a first mover. Moreover, our results show that entry deterrence by the incumbent firm can either amplify or dampen the effect of demand fluctuations on prices, price-cost margins, and capacity utilization.