Entry Deterrence in a Finitely-Lived Industry

The Ghemawat and Nalebuff (1985) exit model is extended to include an entry stage. Demand is high at the time of entry but is expected to eventually decline. It is shown that equilibrium entry decisions may be critically affected by the prospect of a future decline in demand, even when the latter is scheduled to occur in the arbitrarily distant future, or is expected to be of arbitrarily short duration. In all cases, a unique perfect equilibrium for the entry game exists. This equilibrium exhibits counterintuitive features. For example, the incumbent's (and sometimes even the industry's) output may be larger if the incumbent is a monopoly than if faced with a potential entrant.