FLEXIBLE MANUFACTURING, UNCERTAIN CONSUMER TASTES, AND STRATEGIC ENTRY DETERRENCE

This paper investigates the strategic use of ''flexible manufacturing'' technology as an entry-deterring mechanism. It is shown that, when consumers' tastes fluctuate probabilistically, an incumbent threatened with potential entry installs flexible manufacturing technology for a larger set of probabilities that consumers' tastes will change, than the perfectly protected monopolist. The differential probability sets represent the intent of the monopoly incumbent strategically to use product-design flexibility for deterring entry into the potential market and maintain its dominance under fluctuating consumer tastes. This purely preemptive flexibility is shown to exist under reasonable assumptions on the firms' payoff structure.