Mats A. Bergman
Mats A. Bergman: Dept. of Economics, Stockholm School of Economics, Postal: P.O. Box 6501, SE-113 83 Stockholm, Sweden
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.
27 pages, October 22, 1998
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