Capital as a commitment: Strategic investment to deter mobility

Drew Fudenberg*, Jean Tirole

*Corresponding author for this work

Research output: Contribution to journalArticle

98 Scopus citations

Abstract

This paper analyzes how an early entrant in a market can exploit its head start by strategic investment. The analysis is based on Spence's paper, Investment strategy and growth in a new market, (Bell J. Econ., 10 (1979), 1-19). We frist study the investment game in the no-discounting case, which embodies the key features of mobility deterrence. We establish the existence of a set of perfect equilibria and suggest that one particular equilibrium is most reasonable. This equilibrium, also valid with discounting, involves the follower firm being forever deterred from investing to its steady-state reaction curve, in contrast to Spence's proposed solution.

Original languageEnglish (US)
Pages (from-to)227-250
Number of pages24
JournalJournal of Economic Theory
Volume31
Issue number2
DOIs
StatePublished - Jan 1 1983

ASJC Scopus subject areas

  • Economics and Econometrics

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