Uncertainty, Economies of Scale, and Barrier to Entry

Stylianos Perrakis () and George Warskett

Oxford Economic Papers, 1986, vol. 38, issue 0, 58-74

Abstract: Entry deterrence is examined under demand uncertainty and economies of scale. Both incumbent and potential entrant select capacity before demand is observed, provided expected discounted profit exceeds the cost of cap acity (risk neutrality). As in the certainty case, entry deterrence is not profi table in the absence ofeconomies of scale. However, Schmalensee recently proved another certainty result (that the monopoly profit stream which can be shielded from entry by economies of scale is bounded from above by the cost of minimum e fficient scale) is not valid in the presenceof uncertainty, even under risk neu trality. Copyright 1986 by Royal Economic Society.

Date: 1986
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