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

Beth Allen, Raymond Deneckere, Tom Faith and Dan Kovenock

No 187, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: This paper considers the role of capacity as a strategic entry deterrent for a game in which the incumbent and entrant sequentially precommit to capacity levels before competing in price, possibly using mixed strategies. Depending on the magnitudes of the fixed set-up cost, the cost of capacity, and the relative costs of production, the model produces a wide spectrum of equilibrium behaviors, including some not previously suggested in the literature. Interesting deterrence effects occur because firms need time to build. In contrast to much previous work, the incumbent may hold idle capacity when entry is deterred.

Keywords: Competition (search for similar items in EconPapers)
Date: 1995
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Capacity precommitment as a barrier to entry: A Bertrand-Edgeworth approach (2000)
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)
Working Paper: Capacity Precommitment as a Barrier to Entry:A Bertrand-Edgeworth Approach (1994)
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