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Capacity Choice in a Large Market

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  • Mats Godenhielm
  • Klaus Kultti

Abstract

We analyze endogenous capacity formation in a large frictional market with perfectly divisible goods. Each seller posts a price and decides on a capacity. The buyers base their decision on which seller to visit on both characteristics. In this setting we determine the conditions for the existence and uniqueness of a symmetric equilibrium. When capacity is unobservable there exists a continuum of equilibria. We show that the “best” of these equilibria leads to the same seller capacities and the same number of trades as the symmetric equilibrium under observable capacity.

Suggested Citation

  • Mats Godenhielm & Klaus Kultti, 2014. "Capacity Choice in a Large Market," PLOS ONE, Public Library of Science, vol. 9(8), pages 1-7, August.
    • Handle: RePEc:plo:pone00:0101766
    DOI: 10.1371/journal.pone.0101766
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    References listed on IDEAS

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