Journal of Industry, Competition and Trade

, Volume 13, Issue 4, pp 563–597 | Cite as

Capacity Constrained Firms and Expansion Subsidies: Should Governments Avoid Generous Subsidies?

  • Felix Munoz-GarciaEmail author
  • Gulnara Zaynutdinova


This paper examines entry deterrence and signaling when an incumbent firm experiences capacity constraints. Our results show that if the costs that constrained and unconstrained incumbents incur when expanding their facilities are substantially different, separating equilibria can be supported under large parameter values whereby information is perfectly transmitted to the entrant. If, in contrast, both types of incumbent face similar expansion costs, subsidies that reduce expansion costs can help move the industry from a pooling to a separating equilibrium with associated efficient entry. Nonetheless, our results demonstrate that if subsidies are very generous entry patterns remain unaffected, suggesting a potential disadvantage of policies that significantly reduce firms’ expansion costs.


capacity constraints business expansions signaling entry deterrence subsidies 

Jel classification

L12 D82 


  1. Albaek S, Overgaard PB (1994) Advertising and pricing to deter or accommodate entry when demand is unknown: Comment. Int J Ind Organ 12:83–87CrossRefGoogle Scholar
  2. Arvan L (1986) Sunk capacity costs, long-run fixed costs, and entry deterrence under complete and incomplete information. RAND J Econ 17:105–1211CrossRefGoogle Scholar
  3. Bagwell K, Ramey G (1990) Advertising and pricing to deter or accommodate entry when demand is unknown. Int J Ind Organ 8:93–113CrossRefGoogle Scholar
  4. Cho I, Kreps D (1987) Signaling games and stable equilibrium. Q J Econ 102:179–222CrossRefGoogle Scholar
  5. Dixit A (1979) A model of duopoly suggesting a theory of entry barriers. Bell J Econ 10(1):20–32CrossRefGoogle Scholar
  6. Dixit A (1980) The role of investment in entry-deterrence. Econ J 90:95–106CrossRefGoogle Scholar
  7. Espinola-Arredondo A, Gal-Or E, Munoz-Garcia F (2011) When should a firm expand its business? the signaling implications of business expansion. Int J Ind Organ 29:729–745CrossRefGoogle Scholar
  8. Formby, J, Smith WJ (1984) Collusion, entry, and market shares. Review of Industrial Organization, pp 15–25Google Scholar
  9. Harrington J (1986) Limit pricing when the entrant is uncertain about its cost function. Econometrica 54:429–437CrossRefGoogle Scholar
  10. Mason C, Nowell C (1992) Entry, collusion, and capacity constraints. South Econ J 58(4):1002–1014CrossRefGoogle Scholar
  11. Matthews S, Mirmann L (1983) Equilibrium limit pricing: the effects of private information and stochastic demand. Econometrica 51:981–996CrossRefGoogle Scholar
  12. Milgrom P, Roberts J (1982) Limit pricing and entry under incomplete information. Econometrica 50:443–466CrossRefGoogle Scholar
  13. Poitevin M (1990) Strategic financial signaling. Int J Ind Organ 8:499–518CrossRefGoogle Scholar
  14. Ridley D (2008) Herding versus hotelling: market entry with costly information. J Econ Manag Strateg 17:607–631CrossRefGoogle Scholar
  15. The Economist (2010) Shining a light. Solar cells are getting cheaper as subsidies subside, December 9thGoogle Scholar
  16. Ware R (1984) Sunk costs and strategic commitment: a proposed three-stage equilibrium. Econ J 94(374):370–378CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2012

Authors and Affiliations

  1. 1.School of Economic SciencesWashington State UniversityPullmanUSA
  2. 2.Department of Finance and Management ScienceWashington State UniversityPullmanUSA

Personalised recommendations