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Bertrand-Edgeworth duopoly with unit cost asymmetry (*)

Author

Listed:
  • Dan Kovenock

    (Department of Economics, Krannert School of Management, Purdue University, West Lafayette, IN 47907-1310, USA)

  • Raymond J. Deneckere

    (Department of Economics, University of Wisconsin-Madison, Madison, Wisconsin 53706-1393, USA)

Abstract

This paper characterizes the set of Nash equilibria in a price setting duopoly in which firms have limited capacity, and in which unit costs of production up to capacity may differ. Assuming concave revenue and efficient rationing, we show that the case of different unit costs involves a tractable generalization of the methods used to analyze the case of identical costs. However, the supports of the two firms' equilibrium price distributions need no longer be connected and need not coincide. In addition, the supports of the equilibrium price distributions need no longer be continuous in the underlying parameters of the model. As an application of our characterization, we examine the Kreps-Scheinkman model of capacity choice followed by Bertrand-Edgeworth price competition and show that, unlike in the case of identical costs, Cournot equilibrium capacity levels need not arise as subgame-perfect equilibria. The low-cost firm has greater incentive to price its rival out of the market than exists under Cournot behavior.

Suggested Citation

  • Dan Kovenock & Raymond J. Deneckere, 1996. "Bertrand-Edgeworth duopoly with unit cost asymmetry (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 8(1), pages 1-25.
  • Handle: RePEc:spr:joecth:v:8:y:1996:i:1:p:1-25
    Note: Received: March 11, 1991; revised version March 20, 1995
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