Capacity precommitment as an entry barrier for price-setting firms

Abstract

For a Bertrand-Edgeworth framework, this paper considers whether investmentin capacity may serve as a barrier to entry when firms are identical except for the first mover precommitment possibilities that the incumbent enjoys. Subgame-perfect Nash equilibria are examined for a three-stage non-cooperative game in which the incumbent sets a capacity level, the potential entrant chooses its capacity, and then firms set prices using mixed strategies. For some parameter values, entry is blockaded: positive profits for the entrant are precluded. For other parameter values, the incumbent may increase its capacity to prevent entry and maintain non-negative profits.