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The hotelling model with capacity precommitment

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  • BOCCARD, Nicolas

    ()
    (Center for Operations Research and Econometrics (CORE), Université catholique de Louvain (UCL), Louvain la Neuve, Belgium)

  • WAUTHY, Xavier

    ()
    (FNRS and IRES, Université catholique de Louvain (UCL), Louvain la Neuve, Belgium)

Abstract

We consider the two-stage game proposed by Kreps and Scheinkman [83] 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 Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 1997083.

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Date of creation: 01 Nov 1997
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Handle: RePEc:cor:louvco:1997083

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Keywords: Hotelling; Capacity; Price competition;

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Cited by:
  1. Paul Belleflamme & Pierre M. Picard, 2007. "Piracy and Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(2), pages 351-383, 06.

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