Entry Equilibrium under Asymmetric Information

Abstract

Recent progress in the theory of entry-deterrence has cast strong doubts on the validity of the limit pricing theory for ad hoc nature of its underlying behavioral assumption-the Sylos postulate. The postulate states that a potential entrant behaves on an assumption that an established firm maintains its pre-entry output after entry has occurred. Many authors have criticized this assumption for its failure to describe convincingly the rules of the post-entry game. The established firm may find it best to reduce its output when entry actually occurs. Many of recent researches have abandoned the Sylos postulate and instead taken it as the rules of the postentry game that a Nash equilibrium is established after entry occurs. In the words, the "fight" strategy is eliminated from the post-entry strategy set of the established firm. Instead, it has focused on pre-entry strategies of the establised firm that could realize an entry-deterring equilibrium. One example is a prior irrevocablecommitment of the established firm such as sunk capacity.

(Spence 1977; Dixit 1979, 1980; Eaton and Lipsey 1981; Spulber 1981). In these models, depending on the underlying parameters such

as discount factor, cost of capacity and profit structure, the established

firm may choose an entry-deterring capacity.