A large irreversible investment can deter entry or force accommodation precisely because it cannot be undone, converting a threat into a fact.
Capacity built ahead of demand signals that the incumbent will fight rather than retreat, because retreating no longer saves anything. The commitment works by removing the incumbent's own option to be reasonable, which is why flexibility is a liability in this setting and why the investment must be visible to do its work.
In practice
- A firm that builds a plant at twice current demand has told entrants what a price war would look like.
- A publisher that signs a five-year exclusive has removed its own ability to be outbid, and is paid for it.
- Standing
- Compare credible commitment, which is the same logic in bargaining rather than in market structure.
- Subject
- Games & Strategic Interaction
- Essay
- The recurring shapes of conflict and cooperation