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Chapter 36: Public Policy in an Entrepreneurial Society
Zoltan J. Acs 36.1 INTRODUCTION In exogenous entry, the firms exist exogenously as well as the product. Firms compete in the market on price and quantity. With endogenous entry, influenced by the work on endogenous technical change, competition is for the market, where entry can replace the incumbent. This distinction between competition in the market and for the market is a novel way of bringing insights from new growth theory to industrial organization. Industrial organization has four models of competition. The first typology goes back to the early analysis of Augustin Cournot, whose equilibrium concept corresponds to the one that today we associate with John Nash: each firm independently chooses its strategy to maximize profit given the strategy for each of the other firms. The second typology extends these models to endogenous entry. This Marshallian equilibrium can be thought of as Nash equilibrium with free entry. The third typology of competition was introduced by Heinrich von Stackelberg where a firm has a leadership over others, that is, first mover advantage. Under Stackelberg competition, a leader can exploit its first mover advantage taking into account the reaction of its rivals. The final typology of competition completes the taxonomy of the basic market interactions combining the analysis of leadership and endogenous entry. The development of such a framework is the focus of this chapter whose whole theoretical contribution is the characterization of the Stackelberg equilibrium with endogenous entry. The main theoretical contribution of the model is that under endogenous entry, the Stackelberg...
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