Life cycle , dynamic oligopoly , preemption , war of attrition , penicillin
Abstract:
In many industries, the number of firms evolves non-monotonically over
time. A phase of rapid entry is followed by an industry shakeout: a large
number of firms exit within a short period. We present a simple timing game
of entry and exit with an exogenous technological process governing firm effi-
ciency. We calibrate our model to data from the post World War II penicillin
industry. The equilibrium dynamics of the calibrated model closely match
the patterns observed in many industries. In particular, our model gener-
ates richer and more realistic dynamics than competitive models previously
analyzed. The entry phase is characterized by preemption motives while the
shakeout phase mimics a war of attrition. We show that dynamic strategic
incentives accelerate early entry and trigger the shakeout by comparing a
Markov Perfect Equilibrium to an Open-loop Equilibrium.
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