Preemptive Investment with Resalable Capacity

Murugappa Krishnan and Lars-Hendrick Roller

RAND Journal of Economics, 1993, vol. 24, issue 4, 479-502

Abstract: We study an entry game under perfect information, with the salient feature that capacity is resalable. We show that an inability to precommit (to final output) can help rather than hurt. In contrast to other analyses of limited commitment (e.g., Maskin-Tirole (1988)), which do not specify the sources of -- or reasons for -- limits to commitment, we assume that such limits arise from the resalable nature of capacity, and are led naturally to a consideration of additional strategic variables that can improve the incumbent's position in our model. Resalability increases the complexity of the incumbent's precommitment problem, but it also furnishes her with an additional source of power -- in our model, the price at which to resell capacity. While a capacity resale market enables capacity to be shared, and can help anticompetitive behavior, the very existence of a resale market can generate an incentive for a much larger initial level of investment, to the point where the overall equilibrium outcome can be more competitive.

Date: 1993
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