4 - Entry Deterrence in the Commons

Summary

INTRODUCTION

In this chapter we relax one of our assumptions in Chapter 3, namely that the entrant joins the CPR in the second period. Importantly, we considered that the entrant exploits the CPR regardless of how depleted the resource becomes after the incumbent's first-period appropriation. However, in more realistic settings, the incumbent may strategically deplete the resource during the first period (choosing a relatively high x ), deterring the potential entrant from joining the CPR. We examine the incumbent's strategic exploitation in this chapter.

Such an entry-deterring behavior is, however, costly for the incumbent, since entry deterrence may require the resource to be exploited more intensively than in the absence of entry threats. This intense exploitation decreases the incumbent's profits in the first period and leaves the CPR relatively depleted, thus also reducing its profits in the second period. As we show in this chapter, the incumbent may find it worthwhile to deter entry when the benefit from doing so (i.e., facing no competition during the second period) offsets its associated cost, but in other contexts the incumbent may find the entry-deterring costs too high, inducing the firm to accommodate entry.

Our analysis is based on Mason and Polasky (1994, 2002) and Espinola-Arredondo andMuñoz-Garcia (2013a). An example of entrydeterring behavior by an incumbent facing entry threats is that of the Hudson's Bay Company. As described in McLean (1849), this furtrading company faced a threat from French traders considering entering the market, which responded by increasing its beaver harvests from 1736 to 1740, decreasing the estimated beaver population from 208,000 to 173,000. Other examples include the Navajo tribesmen increasing their cattle grazing communal meadows to deter other individuals from using this area, as reported in Johnson et al. (1980), or oil companies increasing their extraction rate to deter other companies from the same oil lease, as in Wiggins and Libecap (1985).

Technically, our setting is analogous to that inGilbert and Vives (1986), which considers an oligopolistic market with N incumbent firms, each of them simultaneously and independently committing, in the first period of the game, to a given production level sold in the second period (once the potential entrant has decided whether or not to enter).