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Price and capacity competition

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  • Acemoglu, Daron
  • Bimpikis, Kostas
  • Ozdaglar, Asuman

Abstract

We study the efficiency of oligopoly equilibria in a model where firms compete over capacities and prices. Our model economy corresponds to a two-stage game. First, firms choose their capacity levels. Second, after the capacity levels are observed, they set prices. Given the capacities and prices, consumers allocate their demands across the firms. We establish the existence of pure strategy oligopoly equilibria and characterize the set of equilibria. We then investigate the efficiency properties of these equilibria, where "efficiency" is defined as the ratio of surplus in equilibrium relative to the first best. We show that efficiency in the worst oligopoly equilibria can be arbitrarily low. However, if the best oligopoly equilibrium is selected (among multiple equilibria), the worst-case efficiency loss is with N firms, and this bound is tight. We also suggest a simple way of implementing the best oligopoly equilibrium.

Suggested Citation

  • Acemoglu, Daron & Bimpikis, Kostas & Ozdaglar, Asuman, 2009. "Price and capacity competition," Games and Economic Behavior, Elsevier, vol. 66(1), pages 1-26, May.
    • Handle: RePEc:eee:gamebe:v:66:y:2009:i:1:p:1-26
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    More about this item

    Keywords

    Capacity Competition Efficiency loss Industry structure Investment oligopoly;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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