Entry, Collusion, and Capacity Constraints

ArticleinSouthern Economic Journal 58(4) · April 1992with13 Reads
DOI: 10.2307/1060235
Entry, Collusion, and Capacity Constraints

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    • "On one hand, Dixit's seminal work (1979, 1980) —analyzing the incentives for an incumbent to deter entry by expanding her capacity in a two-period game— has been expanded in other studies where both incumbent and entrant are perfectly informed. Specifically, Ware (1984) examines entry deterrence in a three-stage game, and Formby and Smith (1984) and Mason and Nowell (1992) study the incumbent's incentives to allow entry and then collude with the entrant. The role of capacity constraints as an entry deterrence device has, however, been analyzed using complete information settings, wherein every firm is able to perfectly observe other firms' cost structure. "
    [Show abstract] [Hide abstract] ABSTRACT: This paper examines entry deterrence and signaling when an incumbent firm experiences a capacity constraint, arising from either her productive efficiency or the high market demand she faces. In both cases, we demonstrate that separating and pooling equilibria can be sustained. Our results show that if the costs that constrained and unconstrained incumbents face when expanding their facilities are substantially different, the separating equilibrium can be supported under large parameter values. In this case, information is perfectly transmitted to the entrant. If, in contrast, both types of incumbent face similar expansion costs, a policy reducing expansion costs can help move the industry from a pooling equilibrium to the separating equilibrium with associated efficient entry. Nonetheless, our results show that if this policy is overemphasized entry patterns remain unaffected, suggesting a potential disadvantage of policies that significantly reduce firms’ expansion costs.
    Full-text · Article · Jan 2011 · International Economic Review
    • "At the same time, the sum of the player's payoffs under the deterrence strategy is smaller than the sum of the player's payoffs at both the Stackelberg and Cournot equilibria in our experiment with the smallest sunk cost. In such a situation, the incumbent may allow entry, seeking to share a bigger industry pie (Mason and Nowell, 1992). An incumbent motivated by notions of equity would also allow entry. "
    [Show abstract] [Hide abstract] ABSTRACT: Our experiments model a two-stage, two person non-cooperative game where subjects face a sequence of potential entry situations. Payoffs and entry costs are common knowledge. The subgame perfect equilibrium entails player I choosing an entry barring output and player E not entering. While many subjects played this way, a significant proportion of E players entered when it yielded negative net payoffs, and a non-trivial proportion of I players didn't seek deterrence. While these proportions fall over the course of the experiment, such behavior persists through the final period. Past experience influences I subjects' tendencies to seek deterrence.
    Full-text · Article · Dec 1998
  • [Show abstract] [Hide abstract] ABSTRACT: The authors analyze a common property resource model with a single incumbent firm that faces future potential entry of a rival. The cost of harvest from the resource is a function of the stock size. By drawing down current stock sufficiently, which lowers future stock, the incumbent can make entry unprofitable. The authors analyze the conditions under which the incumbent firm would deter entry and when entry would be allowed. Further, they analyze the effect that potential entry has on the harvest rate both before and after the date of potential entry and whether or not potential entry is welfare improving. Copyright 1994 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
    Full-text · Article · Feb 1994
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