Entry in a Dynamic Model with Equilibrium Price Dispersion with an Application to the Market for Long-Distance Telephone Services

Models of entry based on the traditional models of oligopoly do not allow for price dispersions on homogenous products. Yet, such price dispersions do exist for homogenous products, and a firm does not lose its entire market share when it fails to charge the lowest price. Existing models of equilibrium price dispersion are not designed to analyze entry in a dynamic framework. A dynamic model is developed that allows an analysis of the effects of entry into a previously monopolized market. Despite asymmetric initial shares, the market shares of equally efficient firms tend to equalize over time. An application is the market for long-distance telephone services following the divestiture of the bell operating companies from AT&T. Copyright 2004 Blackwell Publishing Inc..