Capacity precommitment as an entry barrier for price-setting firms

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Abstract

For a Bertrand-Edgeworth framework, this paper considers whether investmentin capacity may serve as a barrier to entry when firms are identical except for the first mover precommitment possibilities that the incumbent enjoys. Subgame-perfect Nash equilibria are examined for a three-stage non-cooperative game in which the incumbent sets a capacity level, the potential entrant chooses its capacity, and then firms set prices using mixed strategies. For some parameter values, entry is blockaded: positive profits for the entrant are precluded. For other parameter values, the incumbent may increase its capacity to prevent entry and maintain non-negative profits.

Original languageEnglish (US)
Pages (from-to)63-72
Number of pages10
JournalInternational Journal of Industrial Organization
Volume11
Issue number1
DOIs
StatePublished - Mar 1993

Bibliographical note

Funding Information:
Corrrsportdenc,~ to: B. Allen, Department of Economics, University of Minnesota, 1035 Management and Economics, 271 19th Avenue South, Minneapolis, MN 55455. USA. Tel: 612 625-6353; Fax: 612 624-0209. *Partial research support from NSF Grants IST83-14096. IST85-20584. and SE!%-21442 to the University of Pennsylvania is gratefully acknowledged. An informal literature seminar on ‘Barriers to Entry’ at the University of Bonn inspired this work; the other participants deserve thanks but not blame for the outcome. Jon Hamilton provided some helpful comments on a preliminary version; the editor and several anonymous referees also provided useful advice. The usual exemption from responsibility applies.

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