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

Beth Allen, Raymond Deneckere, Tom Faith, Dan Kovenock

Research output: Contribution to journalArticlepeer-review

44 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)501-530
Number of pages30
JournalEconomic Theory
Volume15
Issue number3
DOIs
StatePublished - May 2000

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