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Sunk Capacity Costs, Long-Run Fixed Costs, and Entry Deterrence under Complete and Incomplete Information


  • Larry Arvan


This 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.

Suggested Citation

  • Larry Arvan, 1986. "Sunk Capacity Costs, Long-Run Fixed Costs, and Entry Deterrence under Complete and Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 105-121, Spring.
  • Handle: RePEc:rje:randje:v:17:y:1986:i:spring:p:105-121

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    References listed on IDEAS

    1. Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, vol. 50(4), pages 863-894, July.
    2. Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 461-483, December.
    3. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, vol. 50(6), pages 1431-1451, November.
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    Cited by:

    1. Kyle Bagwell & Garey Ramey, 1996. "Capacity, Entry, and Forward Induction," RAND Journal of Economics, The RAND Corporation, vol. 27(4), pages 660-680, Winter.
    2. 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.
    3. Wickelgren, Abraham L., 2006. "The effect of exit on entry deterrence strategies," Games and Economic Behavior, Elsevier, vol. 54(1), pages 226-240, January.
    4. Michael Waldman, 1988. "The Simple Case of Entry Deterrence Reconsidered," UCLA Economics Working Papers 517, UCLA Department of Economics.

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