Price competition , business cycle , entry , entry deterrence
Abstract:
We consider the interaction between an incumbent firm and a potential entrant, and
examine how this interaction is affected by demand
uctuations. 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
uctuations on prices, price-cost margins, and capacity utilization.
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