Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/221487
Title: 
Authors: 
Bagwell, Kyle
Ramey, Garey
Year of Publication: 
1990
Series/Report no.: 
Discussion Paper No. 1131
Abstract: 
We show that when avoidable fixed costs are introduced into the capacity-and-entry model of Dixit(1980) and Ware(1984), there arises a coordination problem in selecting among postentry Nash equilibria. Elimination of weakly dominated strategies makes it possible for the entrant to us a market-capturing strategy, consisting of a large capacity commitment that selects the entrant's preferred postentry 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 incumben must restrict its capacity by a greater amount, and the relative advantage of the entrant rises.
Document Type: 
Working Paper

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