DP10009 Industry structure and pricing over the business cycle

Author(s):	Yossi Spiegel, Konrad O Stahl
Publication Date:	June 2014
Keyword(s):	business cycle, entry, entry deterrence, price competition
JEL(s):	D43, L41
Programme Areas:	International Macroeconomics, Industrial Organization
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=10009

We consider the interaction between an incumbent firm and a potential entrant, and examine how this interaction is affected by demand fluctuations. Our model gives rise to procyclical entry, prices, and price-cost margins, although the average price in the market can be countercyclical if the entrant is the first mover, and capacity utilization can be either pro- or countercyclical if the incumbent is the first mover. Moreover, our results show that entry deterrence by the incumbent firm can either amplify or dampen the effect of demand fluctuations on prices, price-cost margins, and capacity utilization.