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Capacity and Entry Deterrence under Demand Uncertainty

Sougata Poddar ()

No 96-22, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: I consider a two period model with an incumbent firm and a potential entrant each of whom produces a homogeneous good. There is a demand uncertainty: it can be high or low and it realizes in the second period. The question I ask: How by choosing capacity at an earlier period of actual production of output and, more importently, not knowing which state of demand is going to realize, and knowing that there is a potential entrant, the incumbent firm can influence the outcome of the game by changing its initial condition. To that end, I study how the impact of the distribution of uncertainty deeply affects the incumbent's decision regarding entry deterrence/accommodation. I compare the results with the case where there is no uncertainty.

JEL-codes: D43 L13 (search for similar items in EconPapers)
Pages: 19 pages
Date: 1996-12
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