Capacity Precommitment as a Barrier to Entry: A Bertrand- Engeworth Approach
AbstractWith few exceptions, the literature on the role of capacity as a strategic entry deterrent has assumed Cournot competition in the post-entry game. In contrast, this paper studies a model in which the incumbent and entrant sequentially precommit to capacity levels before competing in price. Interesting deterrence effects arise because firms need time to build, that is, cannot adjust capacity instantaneously in the post-entry game. This approach produces a simple and intuitive set of equilibrium behaviors and generates clear predictions about when these different outcomes are likely to arise. Our model also departs substantially from the existing literature in concluding that sunkness of capacity costs is neither necessary nor sufficient for capacity to have precommitment value.
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Bibliographic InfoPaper provided by Tilburg - Center for Economic Research in its series Papers with number 9483.
Length: 35 pages
Date of creation: 1994
Date of revision:
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Other versions of this item:
- Dan Kovenock & Raymond Deneckere & Tom Faith & Beth Allen, 2000. "Capacity precommitment as a barrier to entry: A Bertrand-Edgeworth approach," Economic Theory, Springer, vol. 15(3), pages 501-530.
- Allen, B. & Deneckere, R. & Faith, T. & Kovenock, D., 1994. "Capacity Precommitment as a Barrier to Entry: A Bertrand-Edgeworth Approach," Purdue University Economics Working Papers 1062, Purdue University, Department of Economics.
- Beth Allen & Raymond Deneckere & Tom Faith & Dan Kovenock, 1995. "Capacity precommitment as a barrier to entry: a Bertrand-Edgeworth approach," Staff Report 187, Federal Reserve Bank of Minneapolis.
- 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.
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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9411001, EconWPA, revised 15 Nov 1994.
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