SFB 303 Discussion Paper No. A - 324
Author: Nett, Lorenz
Title: The role of sunk costs in entry deterrence in a mixed oligopolistic
market
Abstract: The paper deals with a duopolistic situation in which a public firm
(or a corporation) faces market entry of a private firm. In contrast to
existing literature it is assumed that the incumbent wants to maximize
output resp. his market share under a zero profit constraint. We analyze a
three-stage game where firms first choose their capacity, subsequently, and
afterwards output, simultaneously. The market allocation is determined
applying the concept of subgame perfect equilibrium. We consider the
qualitative properties of the market allocation. Dixit suggests that
irreversible capital accumulation gives a private incumbent the possibility
for entry deterrence. In contrast we will see that a public incumbent is
restricted by sunk costs.
Keywords:
JEL-Classification-Number: 610, 611, 614
Creation-Date: October 1990
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