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Sequential capacity and price choices in a duopoly model with demand uncertainty

  • Morten Hviid

This paper analyzes the effect of demand uncertainty in a two-stage duopoly model where firms first choose capacity then price, and shows that the equilibrium is sensitive to the decision structure of the model. If both the capacity choice and the price choice are made simultaneously, no pure strategy equilibrium exists. If prices are chosen sequentially, the pricing stage has two pure strategy equilibria, but only for one of these does a pure strategy equilibrium of the full game exist. Finally, if both capacities and prices are chosen sequentially, a pure strategy equilibrium with strong first mover advantages exists.

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File URL: http://hdl.handle.net/10.1007/BF01227598
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Article provided by Springer in its journal Journal of Economics Zeitschrift für Nationalökonomie.

Volume (Year): 51 (1990)
Issue (Month): 2 (June)
Pages: 121-144

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Handle: RePEc:kap:jeczfn:v:51:y:1990:i:2:p:121-144
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=108909

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  1. Dixon, Huw, 1984. "The existence of mixed-strategy equilibria in a price-setting oligopoly with convex costs," Economics Letters, Elsevier, vol. 16(3-4), pages 205-212.
  2. Morten Hviid, 1989. "A Two Stage Duopoly Model with Demand Uncertainty," Discussion Papers 89-08, University of Copenhagen. Department of Economics.
  3. Gal-Or, Esther, 1985. "First Mover and Second Mover Advantages," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(3), pages 649-53, October.
  4. Osborne, Martin J. & Pitchik, Carolyn, 1986. "Price competition in a capacity-constrained duopoly," Journal of Economic Theory, Elsevier, vol. 38(2), pages 238-260, April.
  5. Novshek, William, 1980. "Equilibrium in simple spatial (or differentiated product) models," Journal of Economic Theory, Elsevier, vol. 22(2), pages 313-326, April.
  6. Raymond Deneckere & Dan Kovenock, 1988. "Price Leadership," Discussion Papers 773, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Dasgupta, Partha & Maskin, Eric, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," Review of Economic Studies, Wiley Blackwell, vol. 53(1), pages 1-26, January.
  8. Joseph E. Stiglitz & G. Frank Mathewson (ed.), 1986. "New Developments in the Analysis of Market Structure," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262690934, June.
  9. G.C. Archibald & B.C. Eaton & Richard Lipsey, 1982. "Address Models of Value Theory," Working Papers 495, Queen's University, Department of Economics.
  10. Ariel Rubinstein, 1988. "Comments on the interpretation of game theory (Now published in Econometrica, 59 (1991), pp.909-924.)," STICERD - Theoretical Economics Paper Series 181, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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