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Capacity precommitment and price competition yield the Cournot outcome

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URI: https://hdl.handle.net/10016/4228
ISSN: 0899-8256
DOI: 10.1016/j.geb.2005.08.011
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capacity_GEB_2003_ps.pdf (344.19 KB)
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2006-08
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Elsevier
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We introduce a simple model of oligopolistic competition where firms first build capacity, and then, after observing the capacity decisions, choose a reservation price at which they are willing to supply their capacities. This model describes many markets more realistically than the model of Kreps and Scheinkman [Kreps, D., Scheinkman, J., 1983. Quantity precommitment and Bertrand competition yield Cournot outcomes. Bell J. Econ. 14, 326–337]. We show that in this new model every pure strategy equilibrium yields the Cournot outcome, and that the Cournot outcome can be sustained by a pure strategy subgame perfect equilibrium.
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Games and Economic Behavior. 2006, vol. 56, nº 2, p. 323-332
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