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The hotelling model with capacity precommitment

Author

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  • BOCCARD, Nicolas

    () (Center for Operations Research and Econometrics (CORE), Université catholique de Louvain (UCL), Louvain la Neuve, Belgium)

  • WAUTHY, Xavier

    () (FNRS and IRES, Université catholique de Louvain (UCL), Louvain la Neuve, Belgium)

Abstract

We consider the two-stage game proposed by Kreps and Scheinkman [83] in the address model of horizontal differentiation developed by Hotelling. Firms choose capacities in the first stage and then compete in price. We show that capacity precommitment softens price competition drastically. In almost all subgame perfect equilibrium, firms behave as if they were an integrated monopoly i.e., choose capacities which exactly cover the market, so that there is no room for price competition at all. The foundation of this result is that capacity precommitment enables firms to take advantage of the local monopoly structure inherent to the Hotelling model. If furthermore the installation cost for capacity is one fourth of the transportation cost, then this result stands for all SPE. We also provide an interesting treatment of mixed strategies equilibria which is quite new in this literature.

Suggested Citation

  • BOCCARD, Nicolas & WAUTHY, Xavier, 1997. "The hotelling model with capacity precommitment," CORE Discussion Papers 1997083, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:1997083
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    File URL: https://uclouvain.be/en/research-institutes/immaq/core/dp-1997.html
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    Cited by:

    1. Paul Belleflamme & Pierre M. Picard, 2007. "Piracy and Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(2), pages 351-383, June.
    2. Kirui, Benard Kipyegon, 2013. "Reconciling Cournot and Bertrand Outcomes: A Review," EconStor Preprints 97305, ZBW - German National Library of Economics.

    More about this item

    Keywords

    Hotelling; Capacity; Price competition;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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