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Price-Setting Supergames With Capacity Constraints

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  • Brock, William A.
  • Scheinkman, Jose A.

Abstract

This paper develops supergame theory for price setting oligopoly where firms produce perfect substitutes.- Results are: First price setting supergame equilibria may support higher industry price and lower industry output than quantity setting equilibria even when there are no capacity constraints at the firm level -- contrary to the classical static results of Bertrand and Cournot. Second, the maximum price that can be supported by trigger strategies is not monotonic as a function of the number of firms and capacity of each. Third, properties of industry equilibrium. under free entry but possible tacit collusion on price are developed. We show that entry is likely to decrease welfare if each entrant uses up resources in establishing his firm.

Suggested Citation

  • Brock, William A. & Scheinkman, Jose A., 1981. "Price-Setting Supergames With Capacity Constraints," SSRI Workshop Series 292587, University of Wisconsin-Madison, Social Systems Research Institute.
  • Handle: RePEc:ags:uwssri:292587
    DOI: 10.22004/ag.econ.292587
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    Cited by:

    1. Lofaro, Andrea, 2002. "On the efficiency of Bertrand and Cournot competition under incomplete information," European Journal of Political Economy, Elsevier, vol. 18(3), pages 561-578, September.
    2. Lee Rivers Mobley, 1996. "Tacit collusion among hospitals in price competitive markets," Health Economics, John Wiley & Sons, Ltd., vol. 5(3), pages 183-193, May.

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    Research Methods/ Statistical Methods;

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