Two identical firms are considering entering a new market that current

Two identical firms are considering entering a new market that currently has no suppliers. The demand is large enough for both firms to make a positive profit. There are no fixed costs to enter.

Explain how a simultaneous decision to enter on the part of the two firms will lead to a different outcome than a sequential entry decision.

ANSWER

If the firms’ entry decisions are simultaneous, then neither firm can issue a credible entry prevention threat. Both firms will enter and a Cournot equilibrium will result. If one firm can decide to enter before the other, it will enter and produce the Stackelberg leader level of output. The other firm will also enter and produce the optimal level of output given the leader’s output.