Strategic Advance Production

Sougata Poddar () and Dan Sasaki
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Dan Sasaki: Department of Economics, University of Exeter

No 104, Discussion Papers from University of Exeter, Department of Economics

Abstract: Advance production serves as a means of quantity commitment. Therefore an oligopolist, unlike a monopolist, may have an incentive to invest in advance production in order to pre-empt its opponent(s) even when [i] it is technologically more costly than on-spot production, and [ii] it does not entitle the firm to Stackelberg leadership in the subsequent marketing stage. When firms set quantities, such pre-emption acts as strategic substitutes between oligopolists. Namely, in a pure strategy subgame perfect equilibrium, some but not all firms may engage in advance production, whether the firms are a priori symmetric or not. More generally, a firm's incentive for advance production arises only if there is a quantity-setting opponent, irrespective of the firm's own strategic variable (i.e., price or quantity) and the characteristics of the concerned products (i.e., substitutes or complements).

Keywords: inventory; storage costs; time preferences; pre-emption; strategic substitution. (search for similar items in EconPapers)
JEL-codes: D43 E22 L13 (search for similar items in EconPapers)
Date: 2001
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Citations: View citations in EconPapers (3)

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