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Consumer Choice and Cournot Behavior in Capacity-Constrained Duopoly Competition

  • Leonard F. Herk
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    In a two-stage model of duopolistic capacity choice and subsequent price competition, consumer switching costs can deter some consumers from seeking service at a low-price firm that lacks sufficient capacity to serve the entire market. In this setting, firms' residual demand functions are aggregated from the firm-selection decisions of individual consumers based on firms' prices and their induced degrees of service reliability. If consumers are approximately risk neutral with respect to service reliability, then capacity-constrained duopoly competition has a unique, subgame-perfect equilibrium in which firms choose Cournot capacities and prices. The equilibrium robustness of Cournot behavior extends to duopoly markets in which consumer switching costs are induced by subscription pricing.

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    Article provided by The RAND Corporation in its journal RAND Journal of Economics.

    Volume (Year): 24 (1993)
    Issue (Month): 3 (Autumn)
    Pages: 399-417

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    Handle: RePEc:rje:randje:v:24:y:1993:i:autumn:p:399-417
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