We show that when avoidable fixed costs are introduced into the capacity-and-entry model of Dixit(1980) and Ware(1984), there arises a coordination problem in selecting among postentry Nash equilibria. Elimination of weakly dominated strategies makes it possible for the entrant to us a market-capturing strategy, consisting of a large capacity commitment that selects the entrant's preferred postentry equilibrium and drives the incumbent from the market. Deterring the entrant's market-capturing strategy typically requires the incumbent to reduce its initial capacity choice. As avoidable fixed costs rise, the incumben must restrict its capacity by a greater amount, and the relative advantage of the entrant rises.
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- Ware, Roger, 1984. "Sunk Costs and Strategic Commitment: A Proposed Three-Stage Equilibrium," Economic Journal, Royal Economic Society, vol. 94(374), pages 370-78, June.
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"Commitment and observability in games,"
Games and Economic Behavior,
Elsevier, vol. 8(2), pages 271-280.
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"On the Strategic Stability of Equilibria,"
Econometric Society, vol. 54(5), pages 1003-37, September.
- KOHLBERG, Elon & MERTENS, Jean-François, . "On the strategic stability of equilibria," CORE Discussion Papers RP 716, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- E. Kohlberg & J.-F. Mertens, 1998. "On the Strategic Stability of Equilibria," Levine's Working Paper Archive 445, David K. Levine.
- Schmalensee, Richard, 1983. "Advertising and Entry Deterrence: An Exploratory Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 636-53, August.
- Lieberman, Marvin B, 1987. "Excess Capacity as a Barrier to Entry: An Empirical Appraisal," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 607-27, June.
- William T. Robinson, 1988. "Marketing Mix Reactions to Entry," Marketing Science, INFORMS, vol. 7(4), pages 368-385.
- Smiley, Robert, 1988. "Empirical evidence on strategic entry deterrence," International Journal of Industrial Organization, Elsevier, vol. 6(2), pages 167-180.
- William J. Baumol & Robert D. Willig, 1981. "Fixed Costs, Sunk Costs, Entry Barriers, and Sustainability of Monopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 96(3), pages 405-431.
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