Extending Entry Models with Applications to Mergers, Bailouts, Entry Deterrence and Procurement

Duke University, Durham NC

Investigators

Abstract

Government policies often directly impact firms' incentives to sell products or services in a particular market. These same incentives may also affect how well policies achieve their goals. Existing economic models of entry take into account the effect of entry on the number and size of firms in a market. However, some important questions about the effects of government policies on entry cannot be answered using existing models, and these models also impose sometimes unrealistic assumptions that directly affect the conclusions that can be drawn. The research team builds new mathematical models of entry that are more realistic in key dimensions. They will use these models to examine (i) merger policy in the airline industry; (ii) the effectiveness of a corporate bailout scheme aimed at preserving competition in timber auctions conducted by the US government; (iii) whether firms can deter entry by keeping prices low in advance of possible entry; and (iv) the possible value of using two-stage indicative bidding schemes in government procurement auctions. The research draws upon recent advances in economic theory and econometrics to build these models. The project focuses on the development of methodological innovations to address important policy questions about the nature and effects of firm competition. The results will be useful for competition policy and government procurement. Graduate students will learn state-of-the art empirical methods and the computer code and data will be widely available.