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Endogenous Timing of Investments Yields Modified Stackelberg Outcomes

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  • Bergman, Mats A.

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    (Dept. of Economics, Stockholm School of Economics)

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    Abstract

    This paper deals with capacity constrained price competition in a duopoly model. The model resembles that in Kreps and Scheinkman (1983), but the timing of the investment/capacity choice is endogenous. In equilibrium, one of the firms will invest to become the Stackelberg leader, although the ratio between the leader's and the follower's capacities is smaller than in the standard Stackelberg outcome. Capacity is built too early, resulting in welfare losses. The leader and the follower will earn equal profits, except when capacity costs are small.

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    Bibliographic Info

    Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 272.

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    Length: 27 pages
    Date of creation: 22 Oct 1998
    Date of revision:
    Handle: RePEc:hhs:hastef:0272

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    Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
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    Related research

    Keywords: Bertrand; Cournot; Stackelberg; strategic investment; excess capacity; games of timing; endogenous entry; rent equalization.;

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    References

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      • Raymond Deneckere & Dan Kovenock, 1988. "Price Leadership," Discussion Papers 773, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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    Cited by:
    1. Mats Bergman, 2005. "When Should an Incumbent be Obliged to Share its Infrastructure with an Entrant Under the General Competition Rules?," Journal of Industry, Competition and Trade, Springer, vol. 5(1), pages 5-26, January.

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