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Strategic investment and excess capacity: A study of the Taiwanese flour industry

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    Abstract

    The Taiwanese flour industry’s capacity utilization rate has maintained an extremely low level of 40% for more than 20 years. This article sets up a two-stage game model and uses the strategic effect of the firm’s capital investment on its rivals’ outputs to explain the nature of this excess capacity. The model is tested with panel data from the Taiwanese flour industry by using non-linear three-stage least squares. The evidences indicate that a large capacity built in the past could have been used strategically to reduce other firms’ outputs, in the context of a concerted action among the incumbent firms.

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    File URL: http://www.cema.edu.ar/publicaciones/download/volume8/ma.pdf
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    Bibliographic Info

    Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

    Volume (Year): VIII (2005)
    Issue (Month): (May)
    Pages: 153-170

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    Handle: RePEc:cem:jaecon:v:8:y:2005:n:1:p:153-170

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    Related research

    Keywords: strategic investment; two-stage game; collusion; conjectural variation;

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    1. Osborne, Martin J & Pitchik, Carolyn, 1987. "Cartels, Profits and Excess Capacity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 413-28, June.
    2. Osborne, Martin J. & Pitchik, Carolyn, 1983. "Profit-Sharing in a Collusive Industry," Working Papers 83-06, C.V. Starr Center for Applied Economics, New York University.
    3. Farrell, Joseph & Shapiro, Carl, 1990. "Horizontal Mergers: An Equilibrium Analysis," American Economic Review, American Economic Association, vol. 80(1), pages 107-26, March.
    4. Davidson, Carl & Deneckere, Raymond J, 1990. "Excess Capacity and Collusion," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(3), pages 521-41, August.
    5. Osborne, Martin J. & Pitchik, Carolyn, 1986. "Price competition in a capacity-constrained duopoly," Journal of Economic Theory, Elsevier, vol. 38(2), pages 238-260, April.
    6. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
    7. Beth Allen & Raymond Deneckere & Tom Faith & Dan Kovenock, 1994. "Capacity Precommitment as a Barrier to Entry:A Bertrand-Edgeworth Approach," Industrial Organization 9411002, EconWPA, revised 14 Nov 1994.
    8. Lars-Hendrik Röller & Robin C. Sickles, 1997. "Capacity and Product Market Competition: Measuring Market Power in a "Puppy-Dog" Industry," CIG Working Papers FS IV 97-31, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    9. Dixon, Huw, 1986. "Strategic Investment with Consistent Conjectures," Oxford Economic Papers, Oxford University Press, vol. 38(0), pages 111-28, Suppl. No.
    10. Fudenberg, Drew & Tirole, Jean, 1984. "The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look," American Economic Review, American Economic Association, vol. 74(2), pages 361-66, May.
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    Cited by:
    1. COCCORESE, Paolo, 2011. "Banks as ‘fat cats’: Branching and Price Decisions in a Two-Stage Model of Competition," CELPE Discussion Papers 118, CELPE - Centre of Labour Economics and Economic Policy, University of Salerno, Italy.
    2. Tay-Cheng Ma, 2007. "Import quotas, price ceilings, and pricing behavior in Taiwan's flour industry," Agribusiness, John Wiley & Sons, Ltd., vol. 23(1), pages 1-15.

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