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Excess Capacity as a Commitment to Promote Entry
Journal of Industrial Economics
Excess capacities held by a dominant firm are usually viewed as ant icompetitive because they constitute a barrier to entry. This paper explores an alternative reason for a dominant firm to hold excess capacities: they serve as an assurance to upstream (or downstream) companies that the dominant firm will not behave opportunistically once they have made their sunk investments. Excess capacities held for this reason lead to a welfare (Pareto) improvement.
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