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Preemptive investment with resaleable capacity

Author: Röller, Lars-Hendrik ; Krishnan, MurugappaINSEAD Area: Technology and Operations Management ; Economics and Political ScienceIn: Rand Journal of Economics, vol. 24, no. 4, winter 1993 Language: EnglishDescription: p. 479-502.Type of document: INSEAD ArticleNote: Please ask the Library for this articleAbstract: We study an entry game under perfect information, with the salient feature that capacity is resaleable. While entry itself is easier (entry deterrence is never even feasible with small fixed costs) it may still be the incumbent, and not the entrant, who is better off. Only for large fixed costs can the incumbent be worse off with resaleable capacity. Further, even if entry deterrence is optimal in a regime without resaleable capacity, the benefit from entry accommodation with resaleable capacity can outweigh the loss of the ability to deter, in a non-null region. An inability to precommit (to final output) can help rather than hurt. This is because in contrast to other analyses of limited commitment (e.g. Maskin-Tirole, 1988), which do not specify the sources of -or reasons for- limits to commitment, by assuming that such limits arise from the resaleable nature of capacity, we are led naturally to a consideration of additional strategic variables which can improve the incumbent's position in our model
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We study an entry game under perfect information, with the salient feature that capacity is resaleable. While entry itself is easier (entry deterrence is never even feasible with small fixed costs) it may still be the incumbent, and not the entrant, who is better off. Only for large fixed costs can the incumbent be worse off with resaleable capacity. Further, even if entry deterrence is optimal in a regime without resaleable capacity, the benefit from entry accommodation with resaleable capacity can outweigh the loss of the ability to deter, in a non-null region. An inability to precommit (to final output) can help rather than hurt. This is because in contrast to other analyses of limited commitment (e.g. Maskin-Tirole, 1988), which do not specify the sources of -or reasons for- limits to commitment, by assuming that such limits arise from the resaleable nature of capacity, we are led naturally to a consideration of additional strategic variables which can improve the incumbent's position in our model

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