IDEAS home Printed from https://ideas.repec.org/p/nwu/cmsems/1131.html
   My bibliography  Save this paper

Capacity

Author

Listed:
  • Kyle Bagwell
  • Garey Ramey

Abstract

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.

Suggested Citation

  • Kyle Bagwell & Garey Ramey, 1990. "Capacity," Discussion Papers 1131, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  • Handle: RePEc:nwu:cmsems:1131
    as

    Download full text from publisher

    File URL: http://www.kellogg.northwestern.edu/research/math/papers/1131.pdf
    File Function: main text
    Download Restriction: no

    References listed on IDEAS

    as
    1. Bagwell, Kyle, 1995. "Commitment and observability in games," Games and Economic Behavior, Elsevier, vol. 8(2), pages 271-280.
    2. Mailath George J., 1993. "Endogenous Sequencing of Firm Decisions," Journal of Economic Theory, Elsevier, vol. 59(1), pages 169-182, February.
    3. Lieberman, Marvin B, 1987. "Excess Capacity as a Barrier to Entry: An Empirical Appraisal," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 607-627, June.
    4. 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.
    5. Ware, Roger, 1984. "Sunk Costs and Strategic Commitment: A Proposed Three-Stage Equilibrium," Economic Journal, Royal Economic Society, vol. 94(374), pages 370-378, June.
    6. Ben-Porath, Elchanan & Dekel, Eddie, 1992. "Signaling future actions and the potential for sacrifice," Journal of Economic Theory, Elsevier, vol. 57(1), pages 36-51.
    7. William T. Robinson, 1988. "Marketing Mix Reactions to Entry," Marketing Science, INFORMS, vol. 7(4), pages 368-385.
    8. Smiley, Robert, 1988. "Empirical evidence on strategic entry deterrence," International Journal of Industrial Organization, Elsevier, vol. 6(2), pages 167-180.
    9. Kohlberg, Elon & Mertens, Jean-Francois, 1986. "On the Strategic Stability of Equilibria," Econometrica, Econometric Society, vol. 54(5), pages 1003-1037, September.
    10. Schmalensee, Richard, 1983. "Advertising and Entry Deterrence: An Exploratory Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 636-653, August.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nwu:cmsems:1131. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Fran Walker). General contact details of provider: http://edirc.repec.org/data/cmnwuus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.