Industry Structure and Pricing Over the Business Cycle

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 a first mover, and capacity utilization can be either pro- or countercyclical if the incumbent is a first mover. Moreover, our results show that entry deterrence by the incumbent firm can either amplify or dampen the effect of demand uctuations on prices, price-cost margins, and capacity utilization.

Spiegel, Yossi und Konrad Stahl (2014), Industry Structure and Pricing Over the Business Cycle, ZEW Discussion Paper Nr. 14-039, Mannheim.