Monopoly Profits Under Free Entry With Very Impatient Players

By Jonathan M. Paul
1988| Working Paper No. 997

This paper studies markets with free entry and costless capacity in which firms are allowed to set their prices (or quantities) after observing the capacities of other firms. It finds that in these markets with free entry, no sunk costs, no entry costs, and no entry barriers subgame perfect equilibria exist which support monopoly profits. The paper also finds that, once the need to deter entry is incorporated into the oligopoly problem, two incumbents can always support monopoly profits at lower discount factors that one incumbent can. This, of course, is the opposite of results attained in theories which ignore potential entry. The paper goes beyond standard folk theorems and shows that subgame perfect positive profit equilibria exist for arbitrarily low discount factors.