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Consumer Choice and Cournot Behavior in Capacity-Constrained Duopoly Competition

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  • Leonard F. Herk
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    Abstract

    In a two-stage model of duopolistic capacity choice and subsequent price competition, consumer switching costs can deter some consumers from seeking service at a low-price firm that lacks sufficient capacity to serve the entire market. In this setting, firms' residual demand functions are aggregated from the firm-selection decisions of individual consumers based on firms' prices and their induced degrees of service reliability. If consumers are approximately risk neutral with respect to service reliability, then capacity-constrained duopoly competition has a unique, subgame-perfect equilibrium in which firms choose Cournot capacities and prices. The equilibrium robustness of Cournot behavior extends to duopoly markets in which consumer switching costs are induced by subscription pricing.

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    Bibliographic Info

    Article provided by The RAND Corporation in its journal RAND Journal of Economics.

    Volume (Year): 24 (1993)
    Issue (Month): 3 (Autumn)
    Pages: 399-417

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    Handle: RePEc:rje:randje:v:24:y:1993:i:autumn:p:399-417

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    Cited by:
    1. de Frutos, Maria-Angeles & Fabra, Natalia, 2007. "Endogenous Capacities and Price Competition: The Role of Demand Uncertainty," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6096, C.E.P.R. Discussion Papers.
    2. Ivaldi, Marc & Jullien, Bruno & Rey, Patrick & Seabright, Paul & Tirole, Jean, 2003. "The Economics of Unilateral Effects," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 222, Institut d'Économie Industrielle (IDEI), Toulouse.
    3. Davis, Douglas D., 1999. "Advance production and Cournot outcomes: an experimental investigation," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 40(1), pages 59-79, September.
    4. Van Tassel, Eric, 2011. "Information disclosure in credit markets when banks' costs are endogenous," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(2), pages 490-497, February.
    5. Karmarkar, Uday S. & Rajaram, Kumar, 2012. "Aggregate production planning for process industries under oligopolistic competition," European Journal of Operational Research, Elsevier, Elsevier, vol. 223(3), pages 680-689.
    6. Bergman, Mats A., 1998. "Endogenous Timing of Investments Yields Modified Stackelberg Outcomes," Working Paper Series in Economics and Finance, Stockholm School of Economics 272, Stockholm School of Economics.

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