This dissertation attempts to shed light on the proposal that firms in concentrated industries may keep excess capacity to forestall entry and/or expansion by rivals. Excess capacity can deter entry by forming expectations on the part of potential entrants that incumbents are capable of responding aggressively to threats. It is closely related to the theory of limit pricing in that excess capacity enables firms to increase output and reduce prices when potential entrants threaten. In order to make a convincing case for excess capacity as a strategic deterrent to entry, all potential sources of excess capacity in a given industry must be considered simultaneously. For example, the divisibility of demand relative to supply may create conditions for chronic excess capacity while demand that is volatile may compel incumbents to maintain a stock of excess capacity in reserve to meet peaks in demand.; Ocean liner shipping in particular appears to exhibit structural factors that can lead to excess capacity. This industry has exhibited chronic excess capacity for much of its history. Excess capacity has persisted even after the enactment of legislation that increased incentive for firms to rationalize services. The issue that will be addressed in this dissertation is to distinguish between excess capacity that is an artifact of structural conditions of supply and demand and excess capacity that may be used to defend against opportunistic rivals. The results of a three-stage least squares model are confirmed by a subsequent random effects and fixed effects with instrumental variables model that shows some support for the entry deterrence element of excess capacity in liner shipping. Finally, a conjectural variations model is estimated to gather insight into the nature of competition in liner shipping and how it may relate to entry-deterring behavior.
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