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Long-Run Competition in Capacity, Short-Run Competition in Price, and the Cournot Model

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  • Carl Davidson
  • Raymond Deneckere

Abstract

In this article we investigate the nature of equilibrium in markets in which firms choose the scale of operation before they make pricing decisions. We analyze a duopoly model in which firms choose their capacities before engaging in Bertrand-like price competition. We demonstrate that the Cournot outcome is unlikely to emerge in such markets and that the equilibrium tends to be more competitive than the Cournot model would predict. In addition, our results indicate a tendency toward asymmetric firm sizes and price dispersion that results from the mixed strategies firms use in equilibrium.

Suggested Citation

  • Carl Davidson & Raymond Deneckere, 1986. "Long-Run Competition in Capacity, Short-Run Competition in Price, and the Cournot Model," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 404-415, Autumn.
  • Handle: RePEc:rje:randje:v:17:y:1986:i:autumn:p:404-415
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