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The market for melons: Cournot competition with unobservable qualities

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Author Info

  • Argenton, Cédric

    ()
    (Dept. of Economics, Stockholm School of Economics)

Abstract

Two firms produce different qualities at possibly different, constant marginal costs. They compete in quantities on a market where buyers only observe the average quality supplied. The model is a generalization of the standard Cournot duopoly, which corresponds to the special case where the two qualities are equal. When the quality differential is large, the firms' output levels are not always strategic substitutes. There can be no, or up to three pure-strategy equilibria. Yet, as long as the cost differential is not extreme, there always exists a stable duopolistic equilibrium. In that sense, strategic quantity-setting helps prevent market unraveling.

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File URL: http://swopec.hhs.se/hastef/papers/hastef0617.pdf
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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 617.

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Length: 49 pages
Date of creation: 30 Dec 2005
Date of revision: 18 Jan 2006
Handle: RePEc:hhs:hastef:0617

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Keywords: Cournot competition; quality; duopoly; asymmetric information; Nash equilibrium;

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