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Capacity precommitment as a barrier to entry: A Bertrand-Edgeworth approach

Author

Listed:
  • Dan Kovenock

    () (Department of Economics, Krannert School of Management, Purdue University,West Lafayette, IN 47907, USA)

  • Raymond Deneckere

    (Department of Economics, University of Wisconsin, Madison, WI 53706-1393, USA)

  • Tom Faith

    (Faith Consulting, Noorderhavenkade 87 A-1, 3039 RK Rotterdam, THE NETHERLANDS)

  • Beth Allen

    (Department of Economics, University of Minnesota, Minneapolis, MN 55455, USA)

Abstract

With 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.

Suggested Citation

  • Dan Kovenock & Raymond Deneckere & Tom Faith & Beth Allen, 2000. "Capacity precommitment as a barrier to entry: A Bertrand-Edgeworth approach," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 15(3), pages 501-530.
  • Handle: RePEc:spr:joecth:v:15:y:2000:i:3:p:501-530
    Note: Received: August 25, 1999; revised version: October 15, 1999
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    References listed on IDEAS

    as
    1. Carl Davidson & Raymond Deneckere, 1986. "Long-Run Competition in Capacity, Short-Run Competition in Price, and the Cournot Model," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 404-415, Autumn.
    2. Raymond J. Deneckere & Dan Kovenock, 1988. "Capacity-Constrained Price Competition When Unit Costs Differ," Discussion Papers 861, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. Allen, Beth, 1993. "Capacity precommitment as an entry barrier for price-setting firms," International Journal of Industrial Organization, Elsevier, vol. 11(1), pages 63-72, March.
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    More about this item

    Keywords

    Bertrand-Edgeworth; Capacity; Entry deterrence; Price competition; Stackelberg equilibrium.;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - 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

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