Entry, Capacity, Investment and Oligopolistic Pricing

The paper argues that entry is deterred in an industry when existing firms have enough capacity to make a new entrant unprofitable. This capacity need not be fully utilized in the absence of entry. This can result in larger costs than are necessary, given output levels. It also results in higher prices and lower levels of output than those implied by various forms of the limit price model. Capacity and other forms of investment are effective entry deterring variables, partly because they are irreversible and represent preemptive commitments to the industry.