A note on holding excess capacity to deter entry in a labour-managed industry

In this paper Zhang's (1993) investigation on whether an established labour-managed firm carries capacity that would be left idle if entry did not occur is reconsidered. To analyse the use of excess capacity as an entry deterrent, I present an extended model with a general constant-returns-to-scale production function instead of the Leontief production function assumed by Zhang. It is shown that the result of Zhang that the LMF carries excess capacity also holds for the constant-returns-to-scale production function. Furthermore, I examine the global stability of the LMF post-entry Nash equilibrium.