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Cheap Talk and Investment Rivalry in the Pulp and Paper Industry[Note 1. We are grateful for suggestions and comments from John ...]
Author(s) -
Christensen Laurits Rolf,
Caves Richard E.
Publication year - 1997
Publication title -
the journal of industrial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.93
H-Index - 77
eISSN - 1467-6451
pISSN - 0022-1821
DOI - 10.1111/1467-6451.00034
Subject(s) - rivalry , precommitment , abandonment (legal) , competition (biology) , scope (computer science) , business , investment (military) , economics , industrial organization , capacity utilization , market economy , microeconomics , political science , biology , ecology , programming language , politics , computer science , law
Determinants of the abandonment of previously announced capacity expansions are analyzed in eleven industries within the North American pulp and paper sector. Given the investor's initial confidence, extent of precommitment of resources, and post‐announcement fresh news, abandonment's likelihood increases with unanticipated projects subsequently announced by rivals. The process suggests a continual auction with the winning projects and firms having certain systematic properties. Unexpected announcements by rivals promote abandonment only in less concentrated industries; elsewhere completion is actually encouraged. Short‐run price competition is found highly sensitive to capacity utilization, and the market's geographic scope is tested.