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Stackelberg Competition with Endogenous Entry*


  • *

     I thank S. Anderson, R. Barro, R. Bork, V. Denicolò, A. Dixit, N. Erkal, M. Gilli, J. Harrington, H. J. Kind, M. Motta, A. Naimzada, P. Natale, D. Piccinin, P. Tirelli, D. Ulph, K. Zigic and participants to seminars at Harvard, MIT, CERGE (Prague), University of Milan, Bicocca, European University Institute, University of Vienna, University of Virginia, University of Amsterdam, Catholic University of Lovain, the Finnish Competition Authority, the 2007 Intertic Conference and other conferences where these ideas were presented. A previous version of this article circulated as ‘Stackelberg Competition with Free Entry’ (2002, mimeo, Harvard University).


I characterise endogenous market structures where leaders have a first-mover advantage and entry is endogenous. Leaders are always more aggressive than the followers, independently from strategic substitutability or complementarity. Under quantity competition, leaders produce more than any follower and I determine the conditions for entry-deterrence (high substitutability and non-increasing marginal costs). Under price competition, leaders set lower prices than the followers (the opposite than with an exogenous number of firms). In contests, leaders invest more than each follower. In all these cases a leadership improves the allocation of resources compared to the Nash equilibrium with endogenous entry.