Capacity Precommitment as a Barrier to Entry:A Bertrand-Edgeworth Approach

Beth Allen, Raymond Deneckere, Tom Faith and Dan Kovenock
Additional contact information
Beth Allen: University of Minnesota
Raymond Deneckere: University of Wisconsin
Tom Faith: Tilburg University

Industrial Organization from University Library of Munich, Germany

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, our model is in the spirit of Kreps and Scheinkman (1983): the incumbent and entrant sequentially precommit to capacity levels before competing in price. Interesting deterrence effects arise because firms need time to build, i.e. cannot adjust capacity instantaneously in the post-entry game. Depending on the sizes of the fixed set-up cost, the cost of capacity and the relative costs of production, our model produces a wide spectrum of equilibrium behaviors. Using a "reverse-judo" tactic a cost disadvantaged incumbent may limit his capacity to induce the entrant to respond less aggressively. When the incumbent is equally or more efficient, a stochastic version of Gelman and Salop's (1983) judo equilibrium may arise. Entry accommodation can also result in the Stackelberg outcome, or the equilibria from Dixit's (1980) quantity-setting game. In contrast to much previous work, we find that when entry is deterred the incumbent may hold idle capacity.Our model thus provides a unified framework in which several equilibrium phenomena previously suggested in the literature appear as special cases, while at the same time suggesting some new ones. Furthermore, it generates clear predictions about the circumstances under which these different outcomes are likely to occur.

JEL-codes: L (search for similar items in EconPapers)
Date: 1994-11-14, Revised 1994-11-14
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Citations: View citations in EconPapers (1)

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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-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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