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Sequential Capacity and Price Choices in a Duopoly Model with Demand Uncertainty

  • Morten Hviid

    (Institute of Economics, University of Copenhagen)

This paper analyzes the effect of demand uncertainty in a two-stage duopoly model where firms first choose capacity then price, and shows that the equilibrium is sensitive to the decision structure of the model. If both the capacity choice and the price choice are made simultaneously, no pure strategy equilibrium exists. If prices are chosen sequentially, the pricing stage has two pure strategy equilibria, but only for one of these does a pure strategy equilibrium of the full game exist. Finally, if both capacities and prices are chosen sequentially, a pure strategy equilibrium with strong first mover advantages exists.

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Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 89-09.

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Length: 23 pages
Date of creation: Mar 1989
Date of revision:
Publication status: Published in: Journal of Economics/Zeitschrift für Nationalokonomie, 1990, 51(2) pp 121-144
Handle: RePEc:kud:kuiedp:8909
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Web page: http://www.econ.ku.dk
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  1. Dixon, Huw, 1984. "The existence of mixed-strategy equilibria in a price-setting oligopoly with convex costs," Economics Letters, Elsevier, vol. 16(3-4), pages 205-212.
  2. Osborne, Martin J. & Pitchik, Carolyn, 1983. "Price Competition in a Capacity-Constrained Duopoly," Working Papers 83-08, C.V. Starr Center for Applied Economics, New York University.
  3. Gal-Or, Esther, 1985. "First Mover and Second Mover Advantages," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(3), pages 649-53, October.
  4. Deneckere, Raymond J & Kovenock, Dan, 1992. "Price Leadership," Review of Economic Studies, Wiley Blackwell, vol. 59(1), pages 143-62, January.
    • Raymond Deneckere & Dan Kovenock, 1988. "Price Leadership," Discussion Papers 773, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Ariel Rubinstein, 1988. "Comments on the interpretation of game theory (Now published in Econometrica, 59 (1991), pp.909-924.)," STICERD - Theoretical Economics Paper Series 181, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  6. G.C. Archibald & B.C. Eaton & Richard Lipsey, 1982. "Address Models of Value Theory," Working Papers 495, Queen's University, Department of Economics.
  7. Dasgupta, Partha & Maskin, Eric, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," Review of Economic Studies, Wiley Blackwell, vol. 53(1), pages 1-26, January.
  8. Morten Hviid, 1989. "A Two Stage Duopoly Model with Demand Uncertainty," Discussion Papers 89-08, University of Copenhagen. Department of Economics.
  9. Joseph E. Stiglitz & G. Frank Mathewson (ed.), 1986. "New Developments in the Analysis of Market Structure," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262690934, June.
  10. Novshek, William, 1980. "Equilibrium in simple spatial (or differentiated product) models," Journal of Economic Theory, Elsevier, vol. 22(2), pages 313-326, April.
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