Capacity precommitment as a barrier to entry: A Bertrand-Edgeworth approach

Dan Kovenock, Raymond Deneckere, Tom Faith and Beth Allen
Additional contact information
Raymond Deneckere: Department of Economics, University of Wisconsin, Madison, WI 53706-1393, USA
Tom Faith: Faith Consulting, Noorderhavenkade 87 A-1, 3039 RK Rotterdam, THE NETHERLANDS
Beth Allen: Department of Economics, University of Minnesota, Minneapolis, MN 55455, USA

Economic Theory, 2000, vol. 15, issue 3, 530 pages

Abstract: With few exceptions, the literature on the role of capacity as a strategic entry deterrent has assumed Cournot competition in the post-entry game. In contrast, this paper studies a model in which the incumbent and entrant sequentially precommit to capacity levels before competing in price. Interesting deterrence effects arise because firms need time to build, that is, cannot adjust capacity instantaneously in the post-entry game. This approach produces a simple and intuitive set of equilibrium behaviors and generates clear predictions about when these different outcomes are likely to arise. Our model also departs substantially from the existing literature in concluding that sunkness of capacity costs is neither necessary nor sufficient for capacity to have precommitment value.

Keywords: Bertrand-Edgeworth; Capacity; Entry deterrence; Price competition; Stackelberg equilibrium. (search for similar items in EconPapers)
JEL-codes: C72 D43 L12 L13 L40 (search for similar items in EconPapers)
Date: 2000-04-13
Note: Received: August 25, 1999; revised version: October 15, 1999
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Citations: View citations in EconPapers (55)

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Related works:
Working Paper: Capacity precommitment as a barrier to entry: a Bertrand-Edgeworth approach (1995)
Working Paper: Capacity Precommitment as a Barrier to Entry: A Bertrand- Engeworth Approach (1994)
Working Paper: Capacity Precommitment as a Barrier to Entry: A Bertrand-Edgeworth Approach (1994)
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