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Endogenous Timing of Investments Yields Modified Stackelberg Outcomes

  • 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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    File URL: http://swopec.hhs.se/hastef/papers/hastef0272.pdf
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    File URL: http://swopec.hhs.se/hastef/papers/hastef0272.ps.zip
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    File URL: http://swopec.hhs.se/hastef/papers/hastef0272.ps
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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
    Date of revision:
    Handle: RePEc:hhs:hastef:0272
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    1. Morten Hviid, 1990. "Sequential capacity and price choices in a duopoly model with demand uncertainty," Journal of Economics, Springer, vol. 51(2), pages 121-144, June.
    2. Anderson, Simon P & Engers, Maxim, 1994. "Strategic Investment and Timing of Entry," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(4), pages 833-53, November.
    3. Carl Davidson & Raymond Deneckere, 1984. "Excess Capacity and Collusion," Discussion Papers 675, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    4. Holden, Steinar & Riis, Christian, 1994. "Entry into a new market a game of timing," International Journal of Industrial Organization, Elsevier, vol. 12(4), pages 549-568, December.
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    8. Gilbert, Richard & Harris, Richard G., 1984. "Competition with Lumpy Investment," Department of Economics, Working Paper Series qt11v5q20z, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    9. Allen, B. & Deneckere, R. & Faith, T. & Kovenock, D., 1994. "Capacity Precommitment as a Barrier to Entry: A Bertrand-Edgeworth Approach," Purdue University Economics Working Papers 1062, Purdue University, Department of Economics.
    10. Brock, William A & Scheinkman, Jose A, 1985. "Price Setting Supergames with Capacity Constraints," Review of Economic Studies, Wiley Blackwell, vol. 52(3), pages 371-82, July.
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    12. Riordan, Michael H & Salant, David J, 1994. "Preemptive Adoptions of an Emerging Technology," Journal of Industrial Economics, Wiley Blackwell, vol. 42(3), pages 247-61, September.
    13. Richard J. Gilbert., 1988. "Mobility Barriers and the Value of Incumbency," Economics Working Papers 8895, University of California at Berkeley.
    14. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
    15. Benoit, Jean-Pierre & Krishna, Vijay, 1987. "Dynamic Duopoly: Prices and Quantities," Review of Economic Studies, Wiley Blackwell, vol. 54(1), pages 23-35, January.
    16. Osborne, Martin J. & Pitchik, Carolyn, 1986. "Price competition in a capacity-constrained duopoly," Journal of Economic Theory, Elsevier, vol. 38(2), pages 238-260, April.
    17. Carl Davidson & Raymond Deneckere, 1986. "Long-Run Competition in Capacity, Short-Run Competition in Price, and the Cournot Model," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 404-415, Autumn.
    18. B. Curtis Eaton & Richard G. Lipsey, 1980. "Exit Barriers are Entry Barriers: The Durability of Capital as a Barrier to Entry," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 721-729, Autumn.
    19. Leonard F. Herk, 1993. "Consumer Choice and Cournot Behavior in Capacity-Constrained Duopoly Competition," RAND Journal of Economics, The RAND Corporation, vol. 24(3), pages 399-417, Autumn.
    20. Ram C. Rao & David P. Rutenberg, 1979. "Preempting an Alert Rival: Strategic Timing of the First Plant by Analysis of Sophisticated Rivalry," Bell Journal of Economics, The RAND Corporation, vol. 10(2), pages 412-428, Autumn.
    21. Eric Maskin & Jean Tirole, 2010. "A Theory of Dynamic Oligopoly, 1: Overview and Quantity Competition with Large Fixed Costs," Levine's Working Paper Archive 397, David K. Levine.
    22. Pal, Debashis, 1996. "Endogenous Stackelberg Equilibria with Identical Firms," Games and Economic Behavior, Elsevier, vol. 12(1), pages 81-94, January.
    23. Robson, Arthur J, 1990. "Duopoly with Endogenous Strategic Timing: Stackelberg Regained," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(2), pages 263-74, May.
    24. Allen, Beth, 1993. "Capacity precommitment as an entry barrier for price-setting firms," International Journal of Industrial Organization, Elsevier, vol. 11(1), pages 63-72, March.
    25. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, June.
    26. Raymond Deneckere & Dan Kovenock, 1988. "Price Leadership," Discussion Papers 773, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    27. Allen, B., 1994. "Capacity Precommitment as a Barrier to Entry : A Bertrand-Edgeworth Approach," Discussion Paper 1994-83, Tilburg University, Center for Economic Research.
    28. Robert W. Staiger & Frank A. Wolak, 1992. "Collusive Pricing with Capacity Constraints in the Presence of Demand Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 203-220, Summer.
    29. A. Michael Spence, 1977. "Entry, Capacity, Investment and Oligopolistic Pricing," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 534-544, Autumn.
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