TRIGGER-POINT MECHANISM AND CONDITIONAL COMMITMENT: IMPLICATIONS FOR ENTRY, COLLUSION, AND WELFARE |
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| Authors: | LARRY D QIU LEONARD K CHENG MICHAEL K FUNG |
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| Institution: | Qiu:;Department of Economics, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong. Phone 852-2358-7628, Fax 852-2358-2084, E-mail Cheng:;Department of Economics, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong. Phone 1-852-2358-7620, Fax 1-852-2358-2084, E-mail Fung:;Department of Business Studies, Hong Kong Polytechnic University, Kowloon, Hong Kong. Phone 1-852-2766-7102, Fax 1-852-2653-3947, E-mail |
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| Abstract: | When fixed, sunk investment costs are high, firms may not have sufficient incentive to enter the market unless future entry is constrained. In this case, the government faces a dilemma between a full commitment and noncommitment of restricted future entry. A way out is to consider a commitment conditional on the realization of the uncertain parameters, such as the trigger-point mechanism (TPM) that sets conditions on current production level, excess capacity, and demand growth under which future entry will be allowed. This article shows that the TPM facilitates the incumbents' collusion but may improve social welfare under certain circumstances. ( JEL L13, L43, L50, H10, H54) |
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