Capacity Commitment and Licensing

The theoretical literature on industrial organization has been argued that firms hold excess capacity to deter entry. However, empirical analysis did not provide much support to this hypothesis. In this paper we show that the dominant firms may hold excess capacity not for entry deterrence but for getting higher benefit from other business strategy such as licensing. We show that co-existence of licensing and excess capacity can be found if the marginal costs of the firms are small enough.Capacity commitment, Entry, Excess capacity, Incumbent, Licensing