The hotelling model with capacity precommitment
AbstractWe consider the two-stage game proposed by Kreps and Scheinkman  in the address model of horizontal differentiation developed by Hotelling. Firms choose capacities in the first stage and then compete in price. We show that capacity precommitment softens price competition drastically. In almost all subgame perfect equilibrium, firms behave as if they were an integrated monopoly i.e., choose capacities which exactly cover the market, so that there is no room for price competition at all. The foundation of this result is that capacity precommitment enables firms to take advantage of the local monopoly structure inherent to the Hotelling model. If furthermore the installation cost for capacity is one fourth of the transportation cost, then this result stands for all SPE. We also provide an interesting treatment of mixed strategies equilibria which is quite new in this literature.
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Bibliographic InfoPaper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 1997083.
Date of creation: 01 Nov 1997
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Hotelling; Capacity; Price competition;
Other versions of this item:
- Boccard, N. & Wauthy, Xavier, 1996. "The Hotelling Model with Capacity Precommitment," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1997030, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 00 Nov 1997.
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
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- Paul, BELLEFLAMME & Pierre, PICARD, 2005.
"Piracy and competition,"
Discussion Papers (ECON - DÃ©partement des Sciences Economiques)
2005057, Université catholique de Louvain, Département des Sciences Economiques.
- BELLEFLAMME, Paul & PICARD, Pierre M., . "Piracy and competition," CORE Discussion Papers RP -1919, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Paul Belleflamme & Pierre M. Picard, 2004. "Piracy and Competition," CESifo Working Paper Series 1350, CESifo Group Munich.
- BELLEFLAMME, Paul & PICARD, Pierre, 2005. "Piracy and competition," CORE Discussion Papers 2005083, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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