Working Papers

C. De Vincenti: Entry Deterrence, Macroeconomic Equilibria and Pro-Competitive policies

This paper presents a macroeconomic model that is microfounded on an industrial structure characterized by an oligopolistic game à la Dixit and Spence within every industry: the incumbents’ investment decisions have commitment value in deterring potential rivals from entering the market. We obtain an entry deterrence macroeconomic equilibrium that has remarkable implications for pro-competitive policies, implications which differ from those usually obtained by other models based on a monopolistic competition framework: (i) the positive effects on employment and the real wage deriving from a competition policy that works to increase the elasticity of the demand curve persist in the long run; (ii) a reduction in the fixed entry cost has favourable effects on the employment and the real wage both in the short and in the long run; (iii) a mix of the two pro-competitive policies - reduction in the fixed entry cost and increase in the elasticity of demand – enhances these results, driving the macroeconomic entry deterrence equilibrium to asymptotically approach the competitive equilibrium.

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