I consider a version of the chain store game where the incumbent firmâ€™s type evolves according to a Markov process with two states: a â€œtoughâ€ type who always fights entry, and a â€œweakâ€ type who prefers to accommodate. There exists a minimal level of persistence necessary for the incumbent to be able to sustain any reputation for being tough. Above that level, as the number of markets T increases, in equilibrium play alternates between intervals of entry by competitors and intervals of deterrence. When T is infinite, then regardless of the discount factor there exists a sequential equilibrium in which the incumbentâ€™s payoff is bounded below her Stackelberg payoff. Both results are in contrast to the outcome when the incumbentâ€™s type is fixed. One interpretation is that reputation is not permanent, but must be renewed occasionally
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