Technological Leadership and the Persistence of Monopoly under Endogenous Entry: Static versus Dynamic Analysis

We build a dynamic oligopoly model in which a particular firm (leader) invests in process innovations facing subsequent endogenous (or free) entry by other firms (followers). All firms that enter the market incur positive entry costs. We identify conditions under which it is optimal for the leader in an initially oligopoly setup with free entry to undertake pre-emptive R&D investment (strategic predation) that eventually leads to the exit of all followers. The novel feature of our approach is that we introduce an explicit dynamic model and compare it with its static counterpart. The dynamic model provides new insights about leader’s intertemporal investment choices and about the dynamics of the market structure. We also contrast the leader’s investment decisions with the decisions of a social planner.