Introduction

This chapter provides an introduction to game-theoretic models of dynamic competition based on repeated commitments (Gromb, Ponssard and Sevy, 1997). The following stylised facts about entry motivate this approach (Geroski, 1995):

1. entry is mostly associated with innovative processes, higher productivity and a context in which the current industry structure and technology are out of line with exogenous changes

2. entrant firms suffer a high-rate of failure and an eventual success can hardly be assessed before a period of 5–10 years

3. entry of innovative firms, whenever successful, leads to the exit of inefficient incumbents.

A number of econometric studies support these facts. Detailed industry analyses illustrate further how the selective reactions to entry may depend on the relative position of the competing firms (Scherer, 1992). These industry analyses focus on the entry of foreign rivals into home markets in a context of increased international competition. More generally, firms enjoying natural markets due to transportation or switching costs may face a similar context when these costs drop due to some external changes.

Under such circumstances, the reactions of incumbent firms appear to be selective: some firms prefer to progressively give up their market share, milking their current business, while others react aggressively through large R&D investments so as to catch back their rivals. According to Scherer, RCA adopted a milking strategy in television sets while Gillette strongly reacted in wet-shaving apparatus.