Capital Commitment and Profitability: An Empirical Investigation

Pankaj Ghemawat and Richard E Caves

Oxford Economic Papers, 1986, vol. 38, issue 0, 94-110

Abstract: Opportunities to precommit costs can either i ncrease the rents of incumbent firms (by deterring entry), or decrease them (thr ough commitment races and lapses into noncooperation). Authors seek to discrimin ate statistically between these predictions in the determinants of profits of bu sinesses in a cross-section of concentrated markets for producer nondurables. Ov erall, a business'sprofitability declines with its industry's scope for precomm itting production capacity (sunk costs). However, variables interacted with the scope for commitment do not point clearly toward one or the othermechanism. The refore, commitment opportunities seem likely to lead to deterrence and noncooper ative rivalry in proportions that differ idiosyncratically among markets. Copyright 1986 by Royal Economic Society.

Date: 1986
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