Demand growth and strategically useful idle capacity

This paper presents a model of an incumbent firm and a potential entrant. If entry occurs, then firms engage in Cournot quantity competition. As in previous studies, pre-entry capacity is used to change the post entry game. However, my model includes two periods, with demand growth between periods. Deterrence can require idle capacity in the first period if there is sufficient demand growth. This result obtains even though the incumbent firm can build capacity between periods. Idle first period capacity is built only to deter first period entry. Copyright 2011 Oxford University Press 2011 All rights reserved, Oxford University Press.

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