Reputation and Entry Deterrence under Short-Run Ownership of a Firm
Abstract This paper discusses the role of the changing ownership of a long-run firm facing a sequence of potential entrants to its market. When there is uncertainty about the firm's type (about its cost of taking an aggressive action) that is observed only by the current owner, it is shown that there exists an equilibrium in which each generation of owners takes the same aggressive action to deter entry regardless of the type. Under a natural refinement of equilibrium beliefs, the path induced by this pooling equilibrium is shown to be unique. The results sharply contrast with the case of long-run ownership where for the same discount factor, the firm's owner separates his actions depending on the type of the firm so that the high-coat firm allows entry every period while the low-cost firm plays aggressively every period. Consequently, the value of the high-cost firm is shown to be strictly higher under short-run ownership than under long-run ownership. Journal of Economic Literature Classification Numbers: C72, L13.