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Endogenous Timing of Investments Yields Modified Stackelberg Outcomes

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  • Bergman, Mats A.

    ()

    (Dept. of Economics, Stockholm School of Economics)

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    This paper deals with capacity constrained price competition in a duopoly model. The model resembles that in Kreps and Scheinkman (1983), but the timing of the investment/capacity choice is endogenous. In equilibrium, one of the firms will invest to become the Stackelberg leader, although the ratio between the leader's and the follower's capacities is smaller than in the standard Stackelberg outcome. Capacity is built too early, resulting in welfare losses. The leader and the follower will earn equal profits, except when capacity costs are small.

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    Paper provided by Stockholm School of Economics in its series SSE/EFI Working Paper Series in Economics and Finance with number 272.

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    Length: 27 pages
    Date of creation: 22 Oct 1998
    Handle: RePEc:hhs:hastef:0272
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