Industry Dynamics with Barriers to Entry

This paper considers the effects of a monopolist raising the cost of entry for potential competitors on Markov-perfect industry dynamics. All entrants serving the model industry incur sunk costs, which they partially recover when exiting. Empirically, the probability of exit declines with the age of the firm. This fact motivates the assumption that an entering firm expects to exit before any incumbent firms. This last-in-first-out assumption selects a unique Markov-perfect equilibrium. With demand shocks that are either uniformly or normally distributed, a sequence of demand thresholds describes firms' equilibrium entry and survival decisions. We calibrate the model to observations from concentrated manufacturing industries and quantify the effects of barriers to entry on the equilibrium number of firms