Credible Spatial Preemption

Abstract

It is often argued that incumbent firms may deter entry by preemptive investment in new goods. We show that these conclusions are reversed when multiproduct incumbentfirms may exit in response to entry. Once entrants are in an industry, an incumbent will often want to withdraw some goods to prevent competition with the entrant from reducing profits on other goods. Such a reaction makes entry more attractive to a potential entrant. The equilibrium industry structure is less likely to be monopolistic as the goods are better substitutes, as exit costs are low, and as the competition between producers of the same good is more intense.