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| Author: | Bagwell, K. Ramey, G. |
| Title: | Capacity, entry, and forward introduction |
| Journal: | RAND Journal of Economics
1996 : WINTER, VOL. 27:4, p. 660-680 |
| Index terms: | FIXED COSTS MARKETS STRATEGY |
| Language: | eng |
| Abstract: | This paper points that the first-mover advantages associated with imcumbency may fail to hold, and may be reversed when there are multiple equilibria in the postcommitment competition. The analysis is framed in terms of Dixit's (1980) sequential capacity choice model with two key modifications. Also, the notion of rationality that governs firms' behavior is modified. The results show that in the presence of avoidable fixed costs and forward-induction inference capacity investment may turn into a liability if it makes shutdown even more attractive than large output. The first mover's ability to exploit its commitment power may by substantially curtailed due to the second mover's superior ability to communicate its strategic intent in subsequent rivalry. |
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