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Strategic Excess Capacity and First-Mover Advantage under Variable Demand

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Authors
Kim, HeeSu
Issue Date
1996
Publisher
Seoul Journal of Economics
Citation
Seoul Journal of Economics 9 (No. 2 1996): 105-122
Keywords
two-period model; incumbent firm; antitrust policy
Abstract
This paper modifies Spulber's (1981) two-period model of entry deterrence game by introducing variable demand. I show that the incumbent firm may hold pre-entry excess capacity under the post entry game rule of Cournot-Nash, if post-entry demand is greater enough than pre-entry demand. The Excess Capacity Hypothesis is thus revived. It is also shown that if the discount rate is sufficiently high under a booming prospect of the market, the incumbent may choose to give up its first-mover advantage by installing extra capacity in the post-entry phase. A numerical example with implications for antitrust policy is also presented.
ISSN
1225-0279
Language
English
URI
http://hdl.handle.net/10371/1078
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College of Social Sciences (사회과학대학)Institute of Economics Research (경제연구소)Seoul Journal of EconomicsSeoul Journal of Economics vol.09(2) (Summer 1996)
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