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Strategic Excess Capacity and First-Mover Advantage under Variable Demand
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- Authors
- Issue Date
- 1996-04
- Citation
- Seoul Journal of Economics, Vol.9 No.2, pp. 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
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