Cheap Talk and Investment Rivalry in the Pulp and Paper Industry

Laurits Rolf Christensen and Richard E. Caves

Journal of Industrial Economics, 1997, vol. 45, issue 1, 47-73

Abstract: Determinants of the abandonment of previously announced capacity expansions are analyzed in eleven industries within the North American pulp and paper sector. Given the investor's initial confidence, extent of precommitment of resources, and post‐announcement fresh news, abandonment's likelihood increases with unanticipated projects subsequently announced by rivals. The process suggests a continual auction with the winning projects and firms having certain systematic properties. Unexpected announcements by rivals promote abandonment only in less concentrated industries; elsewhere completion is actually encouraged. Short‐run price competition is found highly sensitive to capacity utilization, and the market's geographic scope is tested.

Date: 1997
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Journal of Industrial Economics is currently edited by Pierre Regibeau, Yeon-Koo Che, Kenneth Corts, Thomas Hubbard, Patrick Legros and Frank Verboven

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