The Role of Sunk Costs in Entry Deterrence in a Mixed Oligopolistic Market

Lorenz Nett

Annals of Economics and Statistics, 1994, issue 33, 113-131

Abstract: In this paper we clarify the role of strategic precommitment in a mixed oligopolistic market. We consider a model in which both the public incumbent and the private entrant determine capacity in the long run. In the short run the firms compete according to a capacity restricted Cournot game. We prove that the necessity to invest prior to the output decision restricts a public firm in entry deterrence. Moreover, it is shown that fixed set-up costs can be in favor of the entrant. Although the public firm is solely interested in output, taking into account its budget constraint, the public firm realizes profits and deviates from average--and marginal--cost pricing in equilibrium.

Date: 1994
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Persistent link: https://EconPapers.repec.org/RePEc:adr:anecst:y:1994:i:33:p:113-131

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