Sunk Capacity Costs, Long-Run Fixed Costs, and Entry Deterrence under Complete and Incomplete Information

Larry Arvan

RAND Journal of Economics, 1986, vol. 17, issue 1, 105-121

Abstract: This article considers a three-stage, extensive form game where capacity, once installed, is sunk but where fixed costs are not sunk. We show that there may be multiple perfect equilibria of the complete information game. When the entrant is incompletely informed about the incumbent's cost, the entrant may use the incumbent's capacity choice as a signal of the incumbent's cost. We present an example where the incumbent prefers a noninformative capacity signal, since this has the effect of reducing the scale of entry. We present a second example where the entrant is incompletely informed because the incumbent makes a choice over production technologies that is unobservable to the entrant.

Date: 1986
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