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Uncertainty, Entry Deterrence and Excess Capacity

Author

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  • Sougata Poddar

    (Institute of Economics, University of Copenhagen)

Abstract

In a two period strategic model of entry deterrence (a la Dixit, 1980) where the incumbent firm moves before the entrant by installing capacity for production, in a (perfect) equilibrium excess capacity is not observed under a deterministic demand. The question is: Does this result remain valid under demand uncertainty as well? The answer is yes only if the incumbent can produce output beyond the pre-planned capacity, when needed, without incurring any additional cost by expanding its capacity simultaneously while producing output; and no otherwise. Thus a cost reducing investment behavior will lead to excess capacity for an incumbent firm, when there is a potential entrant in the market under demand uncertainty. The other relevant issue that is also analyzed in this paper is to see the impact of the distribution of demand uncertainty on the incumbent's decision, when it faces the choice to deter or accommodate the potential entrant.

Suggested Citation

  • Sougata Poddar, 1997. "Uncertainty, Entry Deterrence and Excess Capacity," Discussion Papers 97-05, University of Copenhagen. Department of Economics.
    • Handle: RePEc:kud:kuiedp:9705
    as

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    More about this item

    Keywords

    demand uncertainty; entry; capacity;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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