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TRIGGER-POINT MECHANISM AND CONDITIONAL COMMITMENT: IMPLICATIONS FOR ENTRY, COLLUSION, AND WELFARE

Authors

  • LARRY D. QIU,

    1. Qiu: Department of Economics, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong. Phone 852-2358-7628, Fax 852-2358-2084, E-mail larryqiu@ust.hk
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  • LEONARD K. CHENG,

    1. Cheng: Department of Economics, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong. Phone 1-852-2358-7620, Fax 1-852-2358-2084, E-mail leonard@ust.hk
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  • MICHAEL K. FUNG

    1. Fung: Department of Business Studies, Hong Kong Polytechnic University, Kowloon, Hong Kong. Phone 1-852-2766-7102, Fax 1-852-2653-3947, E-mail afmikef@inet.polyu.edu.hk
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    • *

      The authors thank Professors Joseph Harrington Jr., Jaehong Kim, Oliver Williamson, Keith Wong, and two referees for helpful comments. They are grateful for financial support by a grant from the Research Grant Council of Hong Kong (HKUST6211/97H).


Abstract

When fixed, sunk investment costs are high, firms may not have sufficient incentive to enter the market unless future entry is constrained. In this case, the government faces a dilemma between a full commitment and noncommitment of restricted future entry. A way out is to consider a commitment conditional on the realization of the uncertain parameters, such as the trigger-point mechanism (TPM) that sets conditions on current production level, excess capacity, and demand growth under which future entry will be allowed. This article shows that the TPM facilitates the incumbents’ collusion but may improve social welfare under certain circumstances. (JEL L13, L43, L50, H10, H54)

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