Endogenous capacities and price competition: the role of demand uncertainty

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dc.contributor.author Frutos, María Ángeles de
dc.contributor.author Fabra, Natalia
dc.date.accessioned 2009-05-27T14:12:57Z
dc.date.available 2009-05-27T14:12:57Z
dc.date.issued 2007-02
dc.identifier.issn 0265-8003
dc.identifier.uri http://hdl.handle.net/10016/4311
dc.description.abstract This paper analyzes a model of capacity choice followed by price competition under demand uncertainty. Under various assumptions regarding the nature and timing of demand realizations, we obtain general predictions concerning the role of demand uncertainty on equilibrium outcomes. We show that it reduces the multiplicity of equilibria, it may rule out the existence of symmetric equilibria, and it leads to endogenous capacity asymmetries even though firms are ex-ante symmetric. Furthermore, as compared to the certainty equivalent game, demand uncertainty reduces prices and increases consumer surplus, but it also decreases total welfare because of the emergence of idle capacity. By relying on the analysis of firms' reaction functions as well as on the theory of submodular games, we are able to show that a subgame perfect equilibrium always exists and to fully characterize it.
dc.format.mimetype application/pdf
dc.language.iso eng
dc.publisher Centre for Economic Policy Research
dc.relation.ispartofseries Discussion Paper
dc.relation.ispartofseries 6096
dc.subject Demand uncertainty
dc.subject Investment
dc.subject Price competition and submodular game
dc.title Endogenous capacities and price competition: the role of demand uncertainty
dc.type workingPaper
dc.relation.publisherversion http://www.cepr.org/pubs/new-dps/showdp.asp?dpno=6096
dc.subject.eciencia Economía
dc.rights.accessRights openAccess
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