Betrand-Edgeworth competition and product differentiation: Hotelling revisited
(2000)
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- Abstract
- This paper deals with situations where firms commit to capacities and compete in prices in the market for a differentiated product. First, we show that in capacity-constrained pricing games with product differentiation, there is a finite number of mixed strategies equilibria with finite support. Next, within the canonical model of Hotelling, we characterise subgame perfect equilibria (SPE) in a two-stage game with capacity commitment followed by price competition. Either equilibrium capacity choices cover the market exactly and there is no room for price competition (in which case the equilibrium outcomes replicate Cournot equilibria), or SPE involve excess capacities and limited price competition in the second period exhibiting Edgeworth cycles. These two types of SPE exist when the costs for capacity installation is negligible; however, if this cost is large enough, only SPE exhibiting Cournot outcomes survive.
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Citations
Boccard, N., & Wauthy, X. (2000). Betrand-Edgeworth competition and product differentiation: Hotelling revisited (CEREC Working Papers 2000/3).