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Strategic investment and excess capacity: A study of the Taiwanese flour industry

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Abstract

The Taiwanese flour industryÂ’s capacity utilization rate has maintained an extremely low level of 40% for more than 20 years. This article sets up a two-stage game model and uses the strategic effect of the firmÂ’s capital investment on its rivalsÂ’ outputs to explain the nature of this excess capacity. The model is tested with panel data from the Taiwanese flour industry by using non-linear three-stage least squares. The evidences indicate that a large capacity built in the past could have been used strategically to reduce other firmsÂ’ outputs, in the context of a concerted action among the incumbent firms.

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  • Tay-Cheng Ma, 2005. "Strategic investment and excess capacity: A study of the Taiwanese flour industry," Journal of Applied Economics, Universidad del CEMA, vol. 8, pages 153-170, May.
    • Handle: RePEc:cem:jaecon:v:8:y:2005:n:1:p:153-170
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    Cited by:

    1. Coccorese, Paolo, 2012. "Banks as ‘fat cats’: Branching and price decisions in a two-stage model of competition," Journal of Economics and Business, Elsevier, vol. 64(5), pages 338-363.
    2. Tay-Cheng Ma, 2007. "Import quotas, price ceilings, and pricing behavior in Taiwan's flour industry," Agribusiness, John Wiley & Sons, Ltd., vol. 23(1), pages 1-15.

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    More about this item

    Keywords

    strategic investment; two-stage game; collusion; conjectural variation;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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