Adjustment Costs of Capital, Pre-Emptive Investments and Industry Structure
34 Pages Posted: 11 Oct 2007
Date Written: 2004
Abstract
Theoretical models of strategic investments indicate that an incumbent firm by making pre-emptive capital investments may restrict an entrant's size and increase its market share, or deter entry. This paper focuses on the incentives of pre-emptive investments to show that upward and downward adjustment costs of capital will be important determinants of the desirability and credibility of pre-emptive investments. This in turn reveals a link between the upward and downward adjustment costs and industry structure. Our empirical results provide some evidence in favor of such a relationship.
Keywords: Strategic investments, capital adjustment costs, sunk costs, industry structure, antitrust
JEL Classification: L11, L40
Suggested Citation: Suggested Citation