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.
JEL-Classification-Number: 610, 611, 614
Creation-Date: October 1990
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