Capacity and Competition: Empirical Evidence on UK Panel Data
Following D. Kreps and J. Scheinkman (1983), it is common to view the difference between Cournot and Bertrand competition as depending on production capacity. Bertrand undercutting is only feasible if firms have capacity to serve the market gained. If firms are capacity constrained, the Cournot model is more appropriate. This paper tests the capacity and competition idea by looking at the relationship between profits and capacity constraints; if capacity constrained firms become more Cournot-like, it should be positive. Using survey data on capacity constraints merged into a panel industry data set for the United Kingdom, the authors find a robust positive relationship. Copyright 1994 by Blackwell Publishing Ltd.
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Volume (Year): 42 (1994)
Issue (Month): 1 (March)
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