Capacity, Output and Sequential Entry, American Economic Review
This paper presents a dynamic model of entry in which established firms pursue a Cournot - Nash (alternatively Stackelberg) strategy toward a potential entrant. The entrant behaves in Cournot-Nash fashion and chooses output on the basis of expected post-entry profits at the equilibrium of the post-entry game. Within this framework, a constant output entry-deterring strategy would in- volve maintenance of an entry-deterring out- put level before and after entry is threatened. An excess capacity entry-deterring strategy would involve holding excess capacity at an entry-deterring level and increasing output to that level after entry is threatened. Special conditions are presented under which the Sylos Postulate or the Excess Capacity Hypothesis will accurately describe optimal entry-deterring strategies. In addition, special conditions are examined under which the established firm maintains a constant output or holds pre-entry excess capacity when large-scale entry does in fact take place. The analysis shows that in general, established firm reactions to entry are quite different from these special cases.
Spulber, Daniel. 1981. Capacity, Output and Sequential Entry. American Economic Review. 71(3): 503-514.