Adjustment Costs of Capital, Pre-Emptive Investments and Industry Structure

34 Pages Posted: 11 Oct 2007

See all articles by Vivek Ghosal

Vivek Ghosal

Rensselaer Polytechnic Institute; Center for Economic Studies and Ifo Institute for Economic Research (CESifo)

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

Ghosal, Vivek, Adjustment Costs of Capital, Pre-Emptive Investments and Industry Structure (2004). Available at SSRN: https://ssrn.com/abstract=1020452 or http://dx.doi.org/10.2139/ssrn.1020452

Vivek Ghosal (Contact Author)

Rensselaer Polytechnic Institute ( email )

110 8th Street
Troy, NY 12180
United States
518-276-3868 (Phone)

HOME PAGE: http://https://faculty.rpi.edu/vivek-ghosal

Center for Economic Studies and Ifo Institute for Economic Research (CESifo)

Poschinger Str. 5
Munich
Germany

HOME PAGE: http://www.cesifo.de

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