EC3099 Units J & K: Entry Models and Strategic Entry Deterrence
Contents
1. Unit J: Dynamic Games and Entry Models 2
Game Theory Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Nash Equilibrium and Extensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Sequential Game Example: Entry Game . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Normal Form vs Extensive Form Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Free Entry in Cournot Model with Fixed Costs . . . . . . . . . . . . . . . . . . . . . . . . 4
Welfare Analysis of Free Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2. Entry Models with Network Effects 8
Network Effects Fundamentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Network Competition Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Equilibrium Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Strategic Implications of Network Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3. Unit K: Stackelberg Competition and Entry Deterrence 11
Stackelberg Duopoly Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Comparison with Cournot Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
First Mover Advantage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Strategic Value of Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4. Entry Deterrence 15
Entry Deterrence Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Entry Deterrence vs Accommodation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Entry Deterrence with Fixed Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Capacity Investment as Entry Deterrence . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Real-World Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Glossary 19
Notation and Symbols 20
Economic Models Reference Sheet 21
1
,EC3099: Entry Models and Strategic Entry Deterrence Units J & K: Page 2
1. Unit J: Dynamic Games and Entry Models
Game Theory Review
Game Structure Components
Component Description
Players The decision-makers in the game
Rules Order of moves, possible actions, information structure
Outcomes Results for each possible combination of actions
Payoffs Expected utilities or profits for each outcome
Game Classifications
Type Definition Characteristics
Static Game Single move per player Players move simultaneously, no time di-
mension
Dynamic Game Multiple moves Sequential decision-making with time di-
mension
Complete Information No private information All relevant information is publicly known
Incomplete Information Some private informa- Players have different information sets
tion
Perfect Information Full history known All past moves and payoffs are observable
Imperfect Information Limited history Some past actions or payoffs are unobserv-
able
Nash Equilibrium and Extensions
Nash Equilibrium: A strategy profile 𝑠∗ ∈ 𝑆 is a Nash equilibrium if for all players 𝑖:
𝑢𝑖 (𝑠∗ ) ≥ 𝑢𝑖 (𝑠∗−𝑖 , 𝑠𝑖 ) for all 𝑠𝑖 ∈ 𝑆𝑖
where 𝑠∗−𝑖 represents all other players’ equilibrium strategies.
Interpretation: No player has an incentive to unilaterally deviate from their equilibrium strategy.
, EC3099: Entry Models and Strategic Entry Deterrence Units J & K: Page 3
Subgame-Perfect Nash Equilibrium (SPNE)
Definition: An SPNE is a strategy profile that induces a Nash equilibrium in every subgame.
Key Properties:
• All players find it optimal to stick to their strategies at any point in the game
• Rules out non-credible threats
• Found using backward induction when possible
• More restrictive than Nash equilibrium - eliminates equilibria based on empty threats
Sequential Game Example: Entry Game
Entry Game: Sequential Decision Making
Entrant moves first, Incumbent observes and responds
Entrant
Stay Out Enter
Incumbent Incumbent
Fight Accommodate Fight Accommodate
(0,2) (1,1) (−1,−1) (0,2)
Figure 1: Entry Game Tree
SPNE Solution: Using backward induction:
• Stage 2: If entry occurs, incumbent prefers Accommodate (payoff 1) over Fight (payoff -1)
• Stage 1: Knowing incumbent will accommodate, entrant compares (1,1) from Enter vs (0,2) from
Stay Out
• Result: Entrant enters, incumbent accommodates - outcome (1,1)
Contents
1. Unit J: Dynamic Games and Entry Models 2
Game Theory Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Nash Equilibrium and Extensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Sequential Game Example: Entry Game . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Normal Form vs Extensive Form Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Free Entry in Cournot Model with Fixed Costs . . . . . . . . . . . . . . . . . . . . . . . . 4
Welfare Analysis of Free Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2. Entry Models with Network Effects 8
Network Effects Fundamentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Network Competition Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Equilibrium Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Strategic Implications of Network Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3. Unit K: Stackelberg Competition and Entry Deterrence 11
Stackelberg Duopoly Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Comparison with Cournot Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
First Mover Advantage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Strategic Value of Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4. Entry Deterrence 15
Entry Deterrence Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Entry Deterrence vs Accommodation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Entry Deterrence with Fixed Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Capacity Investment as Entry Deterrence . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Real-World Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Glossary 19
Notation and Symbols 20
Economic Models Reference Sheet 21
1
,EC3099: Entry Models and Strategic Entry Deterrence Units J & K: Page 2
1. Unit J: Dynamic Games and Entry Models
Game Theory Review
Game Structure Components
Component Description
Players The decision-makers in the game
Rules Order of moves, possible actions, information structure
Outcomes Results for each possible combination of actions
Payoffs Expected utilities or profits for each outcome
Game Classifications
Type Definition Characteristics
Static Game Single move per player Players move simultaneously, no time di-
mension
Dynamic Game Multiple moves Sequential decision-making with time di-
mension
Complete Information No private information All relevant information is publicly known
Incomplete Information Some private informa- Players have different information sets
tion
Perfect Information Full history known All past moves and payoffs are observable
Imperfect Information Limited history Some past actions or payoffs are unobserv-
able
Nash Equilibrium and Extensions
Nash Equilibrium: A strategy profile 𝑠∗ ∈ 𝑆 is a Nash equilibrium if for all players 𝑖:
𝑢𝑖 (𝑠∗ ) ≥ 𝑢𝑖 (𝑠∗−𝑖 , 𝑠𝑖 ) for all 𝑠𝑖 ∈ 𝑆𝑖
where 𝑠∗−𝑖 represents all other players’ equilibrium strategies.
Interpretation: No player has an incentive to unilaterally deviate from their equilibrium strategy.
, EC3099: Entry Models and Strategic Entry Deterrence Units J & K: Page 3
Subgame-Perfect Nash Equilibrium (SPNE)
Definition: An SPNE is a strategy profile that induces a Nash equilibrium in every subgame.
Key Properties:
• All players find it optimal to stick to their strategies at any point in the game
• Rules out non-credible threats
• Found using backward induction when possible
• More restrictive than Nash equilibrium - eliminates equilibria based on empty threats
Sequential Game Example: Entry Game
Entry Game: Sequential Decision Making
Entrant moves first, Incumbent observes and responds
Entrant
Stay Out Enter
Incumbent Incumbent
Fight Accommodate Fight Accommodate
(0,2) (1,1) (−1,−1) (0,2)
Figure 1: Entry Game Tree
SPNE Solution: Using backward induction:
• Stage 2: If entry occurs, incumbent prefers Accommodate (payoff 1) over Fight (payoff -1)
• Stage 1: Knowing incumbent will accommodate, entrant compares (1,1) from Enter vs (0,2) from
Stay Out
• Result: Entrant enters, incumbent accommodates - outcome (1,1)
