Sunk Capacity Costs, Long-Run Fixed Costs, and Entry Deterrence under Complete and Incomplete Information
AbstractThis article considers a three-stage, extensive form game where capacity, once installed, is sunk but where fixed costs are not sunk. We show that there may be multiple perfect equilibria of the complete information game. When the entrant is incompletely informed about the incumbent's cost, the entrant may use the incumbent's capacity choice as a signal of the incumbent's cost. We present an example where the incumbent prefers a noninformative capacity signal, since this has the effect of reducing the scale of entry. We present a second example where the entrant is incompletely informed because the incumbent makes a choice over production technologies that is unobservable to the entrant.
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Bibliographic InfoArticle provided by The RAND Corporation in its journal RAND Journal of Economics.
Volume (Year): 17 (1986)
Issue (Month): 1 (Spring)
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- Kyle Bagwell & Garey Ramey, 1990.
"Capacity, Entry and Forward Induction,"
888, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Michael Waldman, 1988. "The Simple Case of Entry Deterrence Reconsidered," UCLA Economics Working Papers 517, UCLA Department of Economics.
- Wickelgren, Abraham L., 2006. "The effect of exit on entry deterrence strategies," Games and Economic Behavior, Elsevier, vol. 54(1), pages 226-240, January.
- Felix Munoz-Garcia & Gulnara Zaynutdinova, 2013. "Capacity Constrained Firms and Expansion Subsidies: Should Governments Avoid Generous Subsidies?," Journal of Industry, Competition and Trade, Springer, vol. 13(4), pages 563-597, December.
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