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Sequential capacity and price choices in a duopoly model with demand uncertainty

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  • Morten Hviid

Abstract

This paper analyzes the effect of demand uncertainty in a two-stage duopoly model where firms first choose capacity then price, and shows that the equilibrium is sensitive to the decision structure of the model. If both the capacity choice and the price choice are made simultaneously, no pure strategy equilibrium exists. If prices are chosen sequentially, the pricing stage has two pure strategy equilibria, but only for one of these does a pure strategy equilibrium of the full game exist. Finally, if both capacities and prices are chosen sequentially, a pure strategy equilibrium with strong first mover advantages exists.
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  • Morten Hviid, 1990. "Sequential capacity and price choices in a duopoly model with demand uncertainty," Journal of Economics, Springer, vol. 51(2), pages 121-144, June.
    • Handle: RePEc:kap:jeczfn:v:51:y:1990:i:2:p:121-144
    DOI: 10.1007/BF01227598
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    Cited by:

    1. Kalyan Talluri & Victor Martínez-de-Albéniz, 2010. "Dynamic Price Competition with Fixed Capacities," Working Papers 425, Barcelona School of Economics.
    2. Maslov, Alexander & Schwartz, Jesse A., 2022. "Imperfect competition in online auctions," Journal of Mathematical Economics, Elsevier, vol. 102(C).
    3. Alexander Maslov, 2023. "Bertrand Duopoly in Online Consumer-to-Consumer Markets," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 63(1), pages 97-109, August.
    4. Ante Farm, 2017. "Pricing and price competition in consumer markets," Journal of Economics, Springer, vol. 120(2), pages 119-133, March.
    5. Bergman, Mats A., 1998. "Endogenous Timing of Investments Yields Modified Stackelberg Outcomes," SSE/EFI Working Paper Series in Economics and Finance 272, Stockholm School of Economics.
    6. de Frutos, María-Ángeles & Fabra, Natalia, 2011. "Endogenous capacities and price competition: The role of demand uncertainty," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 399-411, July.
    7. Kurt Annen, 2019. "On the first mover advantage in Stackelberg quantity games," Journal of Economics, Springer, vol. 126(3), pages 249-258, April.
    8. A. Bërdëllima, 2021. "Duopoly price competition with limited capacity," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 9(1), pages 143-154, April.
    9. Kim, Jeong-Yoo & Lee, Myeong Ho & Berg, Nathan, 2016. "Peak-load pricing in duopoly," Economic Modelling, Elsevier, vol. 57(C), pages 47-54.
    10. Ricardo F. Reis & Phillip C. Stocken, 2007. "Strategic Consequences of Historical Cost and Fair Value Measurements," Contemporary Accounting Research, John Wiley & Sons, vol. 24(2), pages 557-584, June.
    11. Kalyan Talluri & Víctor Martínez de Albéniz, 2010. "Dynamic price competition with fixed capacities," Economics Working Papers 1205, Department of Economics and Business, Universitat Pompeu Fabra.
    12. Alexander Maslov, 2022. "Competition in online markets with auctions and posted prices," Journal of Economics, Springer, vol. 137(2), pages 145-169, October.
    13. Von der Fehr, Nils-Henrik M. & Fabra, Natalia & de Frutos, Maria-Angeles, 2008. "Investment Incentives and Auction Design in Electricity Markets," CEPR Discussion Papers 6626, C.E.P.R. Discussion Papers.
    14. Jan A. Van Mieghem & Maqbool Dada, 1999. "Price Versus Production Postponement: Capacity and Competition," Management Science, INFORMS, vol. 45(12), pages 1639-1649, December.
    15. Farm, Ante, 2009. "Market Sharing and Price Leadership," Working Paper Series 3/2009, Stockholm University, Swedish Institute for Social Research.

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