Capacity, Entry and Forward Induction

RAND JOURNAL OF ECONOMICS, Vol. 27, No. 4

Posted: 18 Sep 1996

See all articles by Kyle Bagwell

Kyle Bagwell

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Garey Ramey

University of California, San Diego (UCSD) - Department of Economics

Abstract

When avoidable fixed costs are introduced into the entry model of Dixit (1980) and Ware (1984), there arises a coordination problem in selecting among post-entry Nash equilibria. Elimination of weakly dominated strategies allows the entrant to use a market-capturing strategy, consisting of a large capacity commitment that selects the entrant's preferred post-entry equilibrium and drives the incumbent from the market. Deterring the entrant's market- capturing strategy typically requires the incumbent to reduce its initial capacity choice. As avoidable fixed costs rise, the incumbent must restrict its capacity by a greater amount, and the relative advantage of the entrant rises.

JEL Classification: L1, D4, C7

Suggested Citation

Bagwell, Kyle and Ramey, Garey, Capacity, Entry and Forward Induction. RAND JOURNAL OF ECONOMICS, Vol. 27, No. 4, Available at SSRN: https://ssrn.com/abstract=3372

Kyle Bagwell

Stanford University - Department of Economics ( email )

Landau Economics Building
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National Bureau of Economic Research (NBER)

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Garey Ramey (Contact Author)

University of California, San Diego (UCSD) - Department of Economics ( email )

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La Jolla, CA 92093-0508
United States
858-534-5721 (Phone)
858-534-7040 (Fax)

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