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Industry sunk costs and entry dynamics

By Andrew Wait and Vladimir Smirnov

Abstract

We explore an investment game where industry sunk costs provide anincentive for a firm to be a follower into the market as opposedto a leader. For some parameter values, every firm could have adominant strategy to wait, even though immediate entry is sociallyoptimal - this is a like prisoners' dilemma. In equilibrium, afirm is more likely to have a dominant strategy to wait with anincrease in the number of potential entrants. Finally, theequilibrium can display an entry cascade.coordination game

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