Capacity Precommitment as a Barrier to Entry: A Bertrand-Edgeworth 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, our model is in the spirit of Kreps and Scheinkman (1983): the incumbent and entrant sequentially precommit to capacity levels before competing in price. Interesting deterrence effects arise because firms need time to build, i.e. cannot adjust capacity instantaneously in the post-entry game. Depending on the sizes of the fixed set-up cost, the cost of capacity and the relative costs of production, our model produces a wide spectrum of equilibrium behaviors. Using a "reverse-judo" tactic a cost disadvantaged incumbent may limit his capacity to induce the entrant to respond less aggressively. When the incumbent is equally or more efficient, a stochastic version of Gelman and Salop's (1983) judo equilibrium may arise. Entry accommodation can also result in the Stackelberg outcome, or the equilibria from Dixit's (1980) quantity-setting game. In contrast to much previous work, we find that when entry is deterred the incumbent may hold idle capacity.Our model thus provides a unified framework in which several equilibrium phenomena previously suggested in the literature appear as special cases, while at the same time suggesting some new ones. Furthermore, it generates clear predictions about the circumstances under which these different outcomes are likely to occur.
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Bibliographic InfoPaper provided by Purdue University, Department of Economics in its series Purdue University Economics Working Papers with number 1062.
Length: 35 pages
Date of creation: 1994
Date of revision:
competition ; pricing;
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.
- 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.
- Allen, B. & Deneckere, R. & Faith, T. & Kovenock, D., 1994. "Capacity Precommitment as a Barrier to Entry: A Bertrand- Engeworth Approach," Papers 9483, Tilburg - Center for Economic Research.
- 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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