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Pre-Emptive Investment Behaviour and Industry Structure

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  • V Ghosal

Abstract

Models of strategic investment behaviour show that an incumbent firm by making pre-emptive capital investments may restrict the entrant's size and increase its market share, or deter entry and limit the number of firms in the industry. The existing empirical literature on testing strategic investment models offers inconclusive evidence. This paper takes a different approach and focuses on the incentives of pre-emptive investments and shows that upward and downward adjustment costs of capital will be important determinants of the desirability and credibility of pre-emptive investments. This in turn posits a link between the upward and downward adjustment costs and industry structure as measured by concentration and the number of firms. While the empirical analysis is best viewed as suggestive and offering an alternative approach to examining strategic investment behaviour, the empirical results, based on a large sample of US manufacturing industries, reveals evidence in favour of such a relationship.

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Bibliographic Info

Article provided by Economic Issues in its journal Economic Issues.

Volume (Year): 9 (2004)
Issue (Month): 1 (March)
Pages: 47-68

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Handle: RePEc:eis:articl:104ghosal

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  1. Dixit, Avinash, 1979. "The Role of Investment in Entry-Deterrence," The Warwick Economics Research Paper Series (TWERPS) 140, University of Warwick, Department of Economics.
  2. Kessides, Ioannis N, 1990. "Market Concentration, Contestability, and Sunk Costs," The Review of Economics and Statistics, MIT Press, vol. 72(4), pages 614-22, November.
  3. Elie Appelbaum & Chin Lim, 1985. "Contestable Markets under Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 28-40, Spring.
  4. Michael Waldman, 1985. "Noncooperative Entry Deterrence, Uncertainty, and the Free Rider Problem," UCLA Economics Working Papers 364, UCLA Department of Economics.
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  8. Spencer, Barbara J. & Brander, James A., 1992. "Pre-commitment and flexibility : Applications to oligopoly theory," European Economic Review, Elsevier, vol. 36(8), pages 1601-1626, December.
  9. Masson, Robert T & Shaanan, Joseph, 1986. "Excess Capacity and Limit Pricing: An Empirical Test," Economica, London School of Economics and Political Science, vol. 53(211), pages 365-78, August.
  10. Lieberman, Marvin B, 1987. "Excess Capacity as a Barrier to Entry: An Empirical Appraisal," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 607-27, June.
  11. Kennan, John, 1979. "The Estimation of Partial Adjustment Models with Rational Expectations," Econometrica, Econometric Society, vol. 47(6), pages 1441-55, November.
  12. Smiley, Robert, 1988. "Empirical evidence on strategic entry deterrence," International Journal of Industrial Organization, Elsevier, vol. 6(2), pages 167-180.
  13. Reynolds, Stanley S, 1987. "Capacity Investment, Preemption and Commitment in an Infinite Horizon Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(1), pages 69-88, February.
  14. Gilbert, Richard & Vives, Xavier, 1986. "Entry Deterrence and the Free Rider Problem," Review of Economic Studies, Wiley Blackwell, vol. 53(1), pages 71-83, January.
  15. Kessides, Ioannis N, 1986. "Advertising, Sunk Costs, and Barriers to Entry," The Review of Economics and Statistics, MIT Press, vol. 68(1), pages 84-95, February.
  16. Hilke, John C, 1984. "Excess Capacity and Entry: Some Empirical Evidence," Journal of Industrial Economics, Wiley Blackwell, vol. 33(2), pages 233-40, December.
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