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Excess Capacity as a Commitment to Promote Entry

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  • Thomas VON UNGERN-STERNBERG

Abstract

Excess capacities held by a dominant firm are usually viewed as ant icompetitive because they constitute a barrier to entry. This paper explores an alternative reason for a dominant firm to hold excess capacities: they serve as an assurance to upstream (or downstream) companies that the dominant firm will not behave opportunistically once they have made their sunk investments. Excess capacities held for this reason lead to a welfare (Pareto) improvement. Copyright 1988 by Blackwell Publishing Ltd.
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Suggested Citation

  • Thomas VON UNGERN-STERNBERG, 1988. "Excess Capacity as a Commitment to Promote Entry," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 8801, Université de Lausanne, Faculté des HEC, DEEP.
  • Handle: RePEc:lau:crdeep:8801
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    Cited by:

    1. Arijit Mukherjee, 2002. "Capacity Commitment and Licensing," Industrial Organization 0211004, EconWPA.
    2. Venkat Subramaniam, 1998. "Efficient Sourcing and Debt Financing in Imperfect Product Markets," Management Science, INFORMS, vol. 44(9), pages 1167-1178, September.
    3. Wu, Wei-Ming, 2009. "An approach for measuring the optimal fleet capacity: Evidence from the container shipping lines in Taiwan," International Journal of Production Economics, Elsevier, vol. 122(1), pages 118-126, November.
    4. Mikhael Shor, 2008. "An experiment on strategic capacity reduction," Working papers 2012-22, University of Connecticut, Department of Economics.

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