Capacity precommitment as a barrier to entry: A Bertrand-Edgeworth approach |
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| Authors: | Beth Allen Raymond Deneckere Tom Faith Dan Kovenock |
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| Institution: | (1) Department of Economics, University of Minnesota, Minneapolis, MN 55455, USA, US;(2) Federal Reserve Bank of Minneapolis, 90 Hennepin Avenue, Minneapolis, MN 55480, USA, US;(3) Department of Economics, University of Wisconsin, Madison, WI 53706-1393, USA, US;(4) Faith Consulting, Noorderhavenkade 87 A-1, 3039 RK Rotterdam, THE NETHERLANDS, NL;(5) Department of Economics, Krannert School of Management, Purdue University,West Lafayette, IN 47907, USA (e-mail: kovenock@mgmt.purdue.edu), US |
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| Abstract: | Summary. 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.
Received: August 25, 1999; revised version: October 15, 1999 |
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| Keywords: | and Phrases: Bertrand-Edgeworth Capacity Entry deterrence Price competition Stackelberg equilibrium |
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