Stackelberg Competition with Endogenous Entry

Abstract

I characterise endogenous market structures where leaders have a first‐mover advantage and entry is endogenous. Leaders are always more aggressive than the followers, independently from strategic substitutability or complementarity. Under quantity competition, leaders produce more than any follower and I determine the conditions for entry‐deterrence (high substitutability and non‐increasing marginal costs). Under price competition, leaders set lower prices than the followers (the opposite than with an exogenous number of firms). In contests, leaders invest more than each follower. In all these cases a leadership improves the allocation of resources compared to the Nash equilibrium with endogenous entry.

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