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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 272:
Endogenous Timing of Investments Yields Modified Stackelberg Outcomes

Mats A. Bergman ()

Abstract: This paper deals with capacity constrained price competition in a duopoly model. The model resembles that in Kreps and Scheinkman (1983), but the timing of the investment/capacity choice is endogenous. In equilibrium, one of the firms will invest to become the Stackelberg leader, although the ratio between the leader's and the follower's capacities is smaller than in the standard Stackelberg outcome. Capacity is built too early, resulting in welfare losses. The leader and the follower will earn equal profits, except when capacity costs are small.

Keywords: Bertrand; Cournot; Stackelberg; strategic investment; excess capacity; games of timing; endogenous entry; rent equalization.; (follow links to similar papers)

JEL-Codes: D43; L13; (follow links to similar papers)

27 pages, October 22, 1998

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