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Endogenous entry under Bertrand-Edgeworth and Cournot competition with capacity indivisibility

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  • Massimo A. De Francesco

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Abstract

Strategic market interaction is modelled as a two-stage game where potential entrants choose capacities and active firms compete in prices or quantities. Due to capital indivisibility, the capacity choice is made from a finite grid. In either strategic setting, the equilibrium of the game depends on the size of total demand at a price equal to the minimum average cost. With a sufficiently large market, the long-run competitive price emerges at a subgame-perfect equilibrium of either game. Failing the large market condition, equilibrium outcomes are quite different in the two games (in contrast to Kreps and Scheinkman), and neither game reproduces the competitive equilibrium.

Suggested Citation

  • Massimo A. De Francesco, 2006. "Endogenous entry under Bertrand-Edgeworth and Cournot competition with capacity indivisibility," Department of Economics University of Siena 480, Department of Economics, University of Siena.
  • Handle: RePEc:usi:wpaper:480
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    File URL: http://repec.deps.unisi.it/quaderni/480.pdf
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    References listed on IDEAS

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    1. Boccard, Nicolas & Wauthy, Xavier, 2004. "Bertrand competition and Cournot outcomes: a correction," Economics Letters, Elsevier, vol. 84(2), pages 163-166, August.
    2. Vives, Xavier, 1986. "Rationing rules and Bertrand-Edgeworth equilibria in large markets," Economics Letters, Elsevier, vol. 21(2), pages 113-116.
    3. Boccard, Nicolas & Wauthy, Xavier, 2000. "Bertrand competition and Cournot outcomes: further results," Economics Letters, Elsevier, vol. 68(3), pages 279-285, September.
    4. Partha Dasgupta & Eric Maskin, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," Review of Economic Studies, Oxford University Press, vol. 53(1), pages 1-26.
    5. Dixon, Huw, 1985. "Strategic Investment in an Industry with a Competitive Product Market," Journal of Industrial Economics, Wiley Blackwell, vol. 33(4), pages 483-499, June.
    6. William Novshek, 1980. "Cournot Equilibrium with Free Entry," Review of Economic Studies, Oxford University Press, vol. 47(3), pages 473-486.
    7. repec:ebl:ecbull:v:4:y:2003:i:30:p:1-8 is not listed on IDEAS
    8. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Entry; Bertrand-Edgeworth; Cournot; capacity indivisibility;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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