Experience Advantages and Entry Dynamics

We consider an extension of Dixit-Shapiro's (1986) model of entry dynamics to the case when there are experience advantages: each firm's payoff from being in the market increases with past experience, measured by the number of periods it has previously been active. We select an equilibrium of the dynamic entry game which satisfies a number of reasonable properties, in particular that there is no exogenous coordination between potential entrants. It is shown that the equilibrium number of active firms at time t is a path-dependent stochastic process, that is, it converges with probability one but may converge to different values with positive probability. The long-run market structure depends on entry mistakes at early stages of the process.N/