Dynamic Models of Oligopoly

4. SHORT-RUN COMMITMENT, FIXED COSTS, AND NATURAL MONOPOLIES

This section discusses two models of competition in natural monopolies, Eaton and Lipsey [24] and Maskin and Tirole [63]. In each model, the ability of the incumbent to make a short-run commitment to the market allows it to earn a profit despite the threat of entry. Moreover, in each model, the incumbent’s equilibrium net present value goes to zero with the length of the commitment. Thus these models are consistent with the recent work of Grossman [43] and Baumol, Panzar, and Willig [6], who argue that incumbency gives a firm no advantage if commitments are impossible.

4a. Durability of capital

In the Eaton and Lipsey model, the product market is “blackboxed” to focus on capital as ...