Holding Excess Capacity to Deter Entry in a Labour-Managed Industry.

This paper considers the Dixit model of entry deterrence and adapts it to the case in which firms are maximizing surplus per worker rather than profits. The properties of this model are analogous but not identical to those of the Dixit model. Of particular interest is the possibility that the best response functi ons may be positively sloped, even though demand satisfies that a firm's marginal revenue is decreasing in rival firms' output. This possibil ity implies the existence of perfect equilibria in which the incumbent holds excess capacity, which is not possible in the Dixit model give n the above condition.