PRECOMMITMENT AND FINANCIAL STRUCTURE - AN ANALYSIS OF THE EFFECTS OF TAXES

While modern industrial organization theory predicts the use of sunk costs to deter entry, this paper examines some factors that might act to moderate the commitment value of capital and, hence, the entry-barring impact of these sunk costs-to the point, perhaps, that empirical detection might be difficult. We show that the tax system and financial contracts of the incumbent firm may affect its optimal precommitment decision and, in fact, may attenuate the strategic incentives for precommitment.