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Relaxing Bertrand competition : capacity commitment beats quality differentiation

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Author Info
BOCCARD, Nicolas
WAUTHY, Xavier

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Abstract

Both product differentiation through quality and capacity commitment have been shown to relax price competition. However, they have not been considered simultaneously. To this end we consider a three stage game where Þrms choose quality then commit to capacity and Þnally compete in price. We show that in equilibrium, Þrms differentiate their products less than if they were not able to commit to limited capacities. This is because they are able to enjoy Cournot proÞts at the stage where capacity are chosen. Furthermore if the cost of quality is low, capacity pre-commitment completely eliminates the incentives to differentiate

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 1999056.

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Date of creation: 01 Oct 1999
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Handle: RePEc:cor:louvco:1999056

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Related research
Keywords: Vertical Differentiation; Capacity; Bertrand Competition;

Find related papers by JEL classification:
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

References listed on IDEAS
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  1. Kuhn, Kai-Uwe, 1994. "Labour Contracts, Product Market Oligopoly, and Involuntary Unemployment," Oxford Economic Papers, Oxford University Press, vol. 46(3), pages 366-84, July. [Downloadable!] (restricted)
  2. Aumann, Robert J. & Sorin, Sylvain, 1989. "Cooperation and bounded recall," Games and Economic Behavior, Elsevier, vol. 1(1), pages 5-39, March. [Downloadable!] (restricted)
  3. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Blackwell Publishing, vol. 49(1), pages 3-13, January. [Downloadable!] (restricted)
  4. Vives, Xavier, 1989. "Cournot and the oligopoly problem," European Economic Review, Elsevier, vol. 33(2-3), pages 503-514, March. [Downloadable!] (restricted)
  5. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March. [Downloadable!] (restricted)
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  6. Stefan Lutz, 1997. "Vertical product differentiation and entry deterrence," Journal of Economics, Springer, vol. 65(1), pages 79-102, February. [Downloadable!] (restricted)
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  1. Benitez, D. & Bouamra-Mechemache, Z. & Chaaban, J., 2005. "Public labeling revisited : the role of technological constraints under protected designation of origin regulation," Economics Working Paper Archive (Toulouse) 200521, French Institute for Agronomy Research (INRA), Economics Laboratory in Toulouse (ESR Toulouse). [Downloadable!]
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