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Pricing, Investments and Mergers with Intertemporal Capacity Constraints

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Abstract

We set up a duopoly model with dynamic capacity constraints under demand uncertainty. We endogenize the investment decisions of the ?rms, examine their intertemporal pricing behavior, their incentives to merge, as well as the welfare implications of a merger. Whereas under known and constant demand the high capacity ?rm lets its low capacity rival sell out, under demand uncertainty we obtain a rich set of sales patterns. Each unit of available capacity has an option value (or opportunity cost), which depends on both ?rms? capacities, the current demand and the remaining horizon. This option value may be higher when the ?rms act non-cooperatively compared to the case when they merge to form a monopoly. Trade surplus may be higher when a merger takes place, as capacity is more e? ciently managed over time. The prospect of a merger also leads to higher investment levels, as each ?rm wishes to appropriate a higher share of the total surplus. For some levels of the capacity installment cost, a merger that turns the duopoly into a monopoly is welfare improving.

Suggested Citation

  • Charalambos Christou & Rossitsa Kotseva & Nikolaos Vettas, 2009. "Pricing, Investments and Mergers with Intertemporal Capacity Constraints," Discussion Paper Series 2009_06, Department of Economics, University of Macedonia, revised Mar 2009.
  • Handle: RePEc:mcd:mcddps:2009_06
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    Keywords

    dynamic oligopoly; price competition; capacity constraints; inventories; mergers.;

    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
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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