A System dynamics approach to the entry detterence game. Uncovering the dynamic mechanism of the iterated entry deterrence game through a system dynamics model

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The research objective is to gain more insight into the dynamics of the iterated entry deterrence game through a system dynamics approach. While the entry deterrence game has been analyzed many times over, a system dynamics approach can generate new insights. Especially since letting go of assumptions that constrain game theory solutions can lead to very different outcomes than those predicted by system dynamics models. The system dynamics model of the entry showed that the entry deterrence game could not be solved through Bayesian updating and that players instead base their decision on the history of the game. Each decision that the entrant and monopolist make are stored in the history of the game. Based on this history the players determine the probability of the other players’ action and their related expected payoffs. Moreover, analysis of the game showed that the amount of risk that the entrant is willing to take to enter the market is a crucial factor. If the entrant is not willing to take any risk, then the entrant will not enter the market if the probability that the monopolist will fight is sufficiently high. Besides a stable amount of risk the model also explored an amount of risk that developed over time. There were three forms of risk tested: declining growth, linear, and increasing growth. Each of the tested models had the same value in the 100th round of the game. Analysis showed that the declining growth model was most successful. Although it was fought more often the entrant enters consistently relatively early on in the game and can profit from this on the long term, because the sooner the entrants enter consistently the sooner the weak monopolist concedes. At the end of the thesis several recommendations for further research are provided. In general, this thesis confirms the value of modelling games. In relation to the model, there are some elements of the model that needs to be examined more closely such as the risk that the entrant is willing to take.
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