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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)

Abstract

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.

Suggested Citation

  • Bergman, Mats A., 1998. "Endogenous Timing of Investments Yields Modified Stackelberg Outcomes," SSE/EFI Working Paper Series in Economics and Finance 272, Stockholm School of Economics.
    • Handle: RePEc:hhs:hastef:0272
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    Cited by:

    1. Mats Bergman, 2005. "When Should an Incumbent be Obliged to Share its Infrastructure with an Entrant Under the General Competition Rules?," Journal of Industry, Competition and Trade, Springer, vol. 5(1), pages 5-26, January.

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    More about this item

    Keywords

    Bertrand; Cournot; Stackelberg; strategic investment; excess capacity; games of timing; endogenous entry; rent equalization.;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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