Uncertainty and Entry Deterrence
Princeton University - Department of Economics; Harvard University - Department of Economics; Massachusetts Institute of Technology (MIT) - Department of Economics
Economic Theory, Vol. 14, Issue 2, August 1999
We study a model where capacity installation by an incumbent firm serves to deter others from entering the industry. We argue that uncertainty about demand or costs forces the incumbent to choose a higher capacity level than it would under certainty. This higher level diminishes the attractiveness of deterrence (Proposition 1) and, therefore, the range of parameter values for which deterrence occurs (Proposition 2).
JEL Classification: D42, D43, D24Accepted Paper Series
Date posted: November 16, 1999
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