Strategic capacity investment with overlapping ownership

with Richard R. Ruble (Ecole de Management de Lyon)

Overlapping ownership has contrasting effects on capacity investments if duopoly firms invest sequentially. The follower’s reaction is less aggressive, but the leader acts more aggressively, either by choosing larger capacities or by shifting from accommodation to deterrence. If it shifts the leader’s strategy, internalization can increase consumer surplus and welfare. To endogenize leader and follower roles, we allow demand to fluctuate over time and show that, in a preemption equilibrium with internalization, leader entry occurs earlier but at a smaller scale.