Inference on noncooperative entry deterrence

Abstract

This study empirically investigates strategic entry-deterrence behavior under oligopolistic competition. I develop a structural econometric model describing incumbents' entry-deterrence behavior based on the framework of Gilbert and Vives. I show theoretically that incumbents' marginal costs are interval-identified under the assumption that incumbents deter entry in equilibrium. The structural model is estimated using data from the Japanese aluminum smelting industry. A Vuong-type model selection test utilizing an instrument demonstrates that the entry-deterrence model is more consistent with the data than an ordinary Cournot competition model without entry threats.