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Prices, capacities and service quality in a congestible Bertrand duopoly

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  • Bruno De Borger

    ()

  • Kurt Van Dender

    ()

Abstract

We study the duopolistic interaction between congestible facilities that supply perfect substitutes. Firms are assumed to make sequential decisions on capacities and prices. Since the outcomes directly affect consumersÂ’ time cost of accessing or using a facility, the capacity sharing rule is endogenous. We study this two-stage game for different firm objectives and compare the duopoly outcomes with those under monopoly and at the social optimum. For the symmetrical duopoly outcome, our findings include the following. First, for profit maximizing firms both capacity provision and service quality are distorted under duopoly: they are below the socially optimal levels. This contrasts with the monopoly outcome, where pricing and capacity provision are such that the monopolist does provide the socially optimal level of service quality. Second, duopoly prices are lower than monopoly prices, but higher than in the social optimum. Hence, while price competition between duopolists yields benefits for consumer, capacity competition is harmful. Third, price-capacity competition implies that higher capacity costs may lead to higher profits for both facilities. Finally, if firms care about output as well as profits, this mainly affects pricing behavior; strategic interactions in capacities are much less affected. Finally, we explore the conditions under which symmetrical and asymmetrical duopoly equilibria arise and when they are stable.

Suggested Citation

  • Bruno De Borger & Kurt Van Dender, 2005. "Prices, capacities and service quality in a congestible Bertrand duopoly," ERSA conference papers ersa05p221, European Regional Science Association.
  • Handle: RePEc:wiw:wiwrsa:ersa05p221
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    Cited by:

    1. Borger Bruno De & Dunkerley Fay & Proost Stef, 2008. "The Interaction between Tolls and Capacity Investment in Serial and Parallel Transport Networks," Review of Network Economics, De Gruyter, vol. 7(1), pages 1-23, March.
    2. De Borger, B. & Dunkerley, F. & Proost, S., 2007. "Strategic investment and pricing decisions in a congested transport corridor," Journal of Urban Economics, Elsevier, vol. 62(2), pages 294-316, September.
    3. Van Dender, Kurt, 2007. "Determinants of fares and operating revenues at US airports," Journal of Urban Economics, Elsevier, vol. 62(2), pages 317-336, September.
    4. Vincent Van Den Berg, 2011. "The effect of private road supply on the volume/capacity ratio when firms compete Stackelberg in Road Capacity," ERSA conference papers ersa11p1203, European Regional Science Association.
    5. de Palma, André & Kilani, Moez & Lindsey, Robin, 2007. "Maintenance, service quality and congestion pricing with competing roads," Transportation Research Part B: Methodological, Elsevier, vol. 41(5), pages 573-591, June.
    6. Chou, Yon-Chun & Chung, Hsien-Jung, 2009. "Service-based capacity strategy for manufacturing service duopoly of differentiated prices and lognormal random demand," International Journal of Production Economics, Elsevier, vol. 121(1), pages 162-175, September.
    7. van den Berg, Vincent A.C., 2012. "Auctions for private congestible infrastructures," MPRA Paper 40103, University Library of Munich, Germany.
    8. Xiao, Feng & Yang, Hai & Han, Deren, 2007. "Competition and efficiency of private toll roads," Transportation Research Part B: Methodological, Elsevier, vol. 41(3), pages 292-308, March.

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