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Demand fluctuations and capacity utilization under duopoly

Author

Listed:
  • Jean J. Gabszewicz

    (CORE, Universite Catholique de Louvain, Voie du Roman Pays 34, B-1348 Louvain-la-Neuve, BELGIUM)

  • Sougata Poddar

    (CORE, Universite Catholique de Louvain, Voie du Roman Pays 34, B-1348 Louvain-la-Neuve, BELGIUM)

Abstract

This paper studies the impact of uncertain demand on firms' capacity decisions when they operate in an oligopolistic environment. We define a two-stage game where firms choose capacity in the first stage without knowing which state of Nature is going to realize, and output levels in the second, knowing which state is realized. We prove the existence of a symmetric subgame perfect equilibrium at which firms are in excess capacity compared with the capacity they would choose in the Cournot certainty equivalent game.

Suggested Citation

  • Jean J. Gabszewicz & Sougata Poddar, 1997. "Demand fluctuations and capacity utilization under duopoly," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 10(1), pages 131-146.
    • Handle: RePEc:spr:joecth:v:10:y:1997:i:1:p:131-146
    Note: Received: May 17, 1996; revised version July 31, 1996
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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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