Dynamic entry and exit with uncertain cost positions Hanazono, Makoto; Yang, Huanxing

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Hanazono, Makoto ; Yang, Huanxing
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International Journal of Industrial Organization
Business, international; Business
To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.ijindorg.2008.12.002 Byline: Makoto Hanazono (a), Huanxing Yang (b) Keywords: Entry; Shakeout; Learning; Cost positions Abstract: We study the dynamics of entry and exit based on firms' learning about their relative cost positions. Each firm's marginal cost of production is its own private information, thereby facing ex ante uncertainty about its cost position. The (inelastic) market demand can accommodate only a fraction of firms to operate, and thus only firms with relatively lower costs are viable in the long run. Some firms in the market will exit if excessive entry (or overshooting) occurs. We derive the unique symmetric sequential equilibrium. The equilibrium properties are consistent with empirical observations: (i) entry occurs gradually over time with lower cost firms entering earlier than higher cost firms, (ii) exiting firms are among the ones that entered later (indeed in the last period). Moreover, equilibrium overshooting probability is shown to always be positive and decreasing over time. Author Affiliation: (a) Nagoya University, Japan (b) Ohio State University, United States Article History: Received 22 September 2008; Revised 18 November 2008; Accepted 10 December 2008 Article Note: (footnote) [star] We would like to thank Dirk Bergemann, Luis Cabral, Johannes Horner, Dan Levin, Matt Lewis, Ichiro Obara, James Peck, Tadashi Sekiguchi, an anonymous referee, and the participants of the Fall 2007 Midwest Economic Theory Meetings at Michigan, the 2007 Workshop on Mathematical Economics at Keio, the 2008 International Industrial Organization Conference at Washington D.C., and the seminars at ARISH, Nihon University, Ohio State University and Nagoya University for helpful discussions and comments. Hanazono gratefully acknowledges the financial support from Japan Economic Research Foundation.
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