In a a two period model of strategic entry deterrence (a la Dixit, 1980) where the incumbent firm moves before the entrant by installing capacity for production, in a (perfect) equilibrium excess capacity is not observed under a deterministic demand. The question whether this result remains valid under demand uncertainty is analyzed. It has been shown that the result of holding no excess capacity may not hold when there is a demand uncertainty. In connection to this, the other relevant issue that is also analyzed in this paper, is to see the impact of the distribution of demand uncertainty on uncumbent's decision, when it faces the choice to deter or accomodate the potential entrant.
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Paper provided by Indira Gandhi Institute of Development Research- in its series Papers with number
148.
Length: 18 pages Date of creation: 1998 Date of revision: Handle: RePEc:fth:indgan:148
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Find related papers by JEL classification: D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
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