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Equilibrium vertical differentiation in a Bertrand model with capacity precommitment

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  • Boccard, N.
  • Wauthy, X.Y.

Abstract

Both quality differentiation and capacity commitment have been shown to relax price competition. However, their joint influence on the outcome of price competition has not yet been assessed. In this article, we consider a three-stage game in which firms choose quality, then commit to capacity and, finally, compete in price. When the cost of quality is negligible, we show that firms do not differentiate their products in a subgame perfect equilibrium, in other words, capacity precommitment completely eliminates the incentive to differentiate by quality.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 28 (2010)
Issue (Month): 3 (May)
Pages: 288-297

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Handle: RePEc:eee:indorg:v:28:y:2010:i:3:p:288-297

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Web page: http://www.elsevier.com/locate/inca/505551

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Keywords: Vertical differentiation Capacity Bertrand competition;

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References

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  1. Lutz, Stefan, 1996. "Vertical Product Differentiation and Entry Deterrence," CEPR Discussion Papers 1455, C.E.P.R. Discussion Papers.
  2. Motta, Massimo, 1993. "Endogenous Quality Choice: Price vs. Quantity Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 41(2), pages 113-31, June.
  3. Davidson, Carl & Deneckere, Raymond J, 1990. "Excess Capacity and Collusion," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(3), pages 521-41, August.
  4. Economides, Nicholas, 1989. "Quality variations and maximal variety differentiation," Regional Science and Urban Economics, Elsevier, vol. 19(1), pages 21-29, February.
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  8. Victor Ginsburgh & André De Palma & Yorgo Papageorgiou & Jacques-François Thisse, 1999. "The principle of minimum differentiation holds under sufficient heterogeneity," ULB Institutional Repository 2013/3319, ULB -- Universite Libre de Bruxelles.
  9. Brock, William A & Scheinkman, Jose A, 1985. "Price Setting Supergames with Capacity Constraints," Review of Economic Studies, Wiley Blackwell, vol. 52(3), pages 371-82, July.
  10. Lambson Val Eugene, 1994. "Some Results on Optimal Penal Codes in Asymmetric Bertrand Supergames," Journal of Economic Theory, Elsevier, vol. 62(2), pages 444-468, April.
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  15. Maggi, Giovanni, 1996. "Strategic Trade Policies with Endogenous Mode of Competition," American Economic Review, American Economic Association, vol. 86(1), pages 237-58, March.
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Citations

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Cited by:
  1. E. Bacchiega & A. Minniti, 2013. "Training and Product Quality in Unionized Oligopolies," Working Papers wp871, Dipartimento Scienze Economiche, Universita' di Bologna.
  2. WAUTHY, Xavier, 2009. "Market coverage and the nature of product differentiation : a note," CORE Discussion Papers 2009081, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Li, Youping, 2014. "Price leadership in a vertically differentiated market," Economic Modelling, Elsevier, vol. 38(C), pages 67-70.
  4. Boccard, Nicolas & Wauthy, Xavier, 2003. "Sales Restriction, Quality Selection and the Mode of Competition," Working Papers of the Department of Economics, University of Girona 5, Department of Economics, University of Girona.
  5. Makoto Yano & Takashi Komatsubara, 2012. "Price Competition or Tacit Collusion," KIER Working Papers 807, Kyoto University, Institute of Economic Research.

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