## Applications

Our results and methods can be applied to the computational and empirical analysis of market structure and competition.

This paper considers the effects of raising the cost of entry for a potential competitor on infinite-horizon Markov-perfect duopoly dynamics with ongoing demand uncertainty. All entrants serving the model industry incur sunk costs, and exit avoids future fixed costs. We focus on the unique equilibrium with last-in first-out expectations— a firm never exits leaving behind an active younger rival— and confirm our results for a version of the model in which firms move simultaneously. We prove that raising a second producer’s sunk entry cost in an industry that supports at most two firms reduces the probability of having a duopoly but increases the probability that some firm will serve the industry. Numerical experiments indicate that a barrier to entry’s quantitative relevance depends crucially on properties of the demand process. If demand shocks are more persistent, a barrier to entry has smaller effects on the second entrant’s entry decision rule and the probability of observing a duopoly. With larger variance of demand, a barrier’s effect on the market structure is similarly reduced, even though the second firm’s entry decision is now affected more. This confirms Carlton’s (2004) assertion that the effects of a barrier depend crucially on industry dynamics that two- stage “short run/long run” models capture poorly.