Capacity Choice under Uncertainty with Product Differentiation

Christiaan Behrens and Mark Lijesen ()
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Christiaan Behrens: VU University Amsterdam

No 12-113/VIII, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We explore the characteristics of a capacity-then-price game for a duopoly market with product differentiation and stochastic demand. The analysis shows that a minimum threshold value for the level of vertical product differentiation exists, relative to horizontal product differentiation, for which existence of a Nash equilibrium in pure strategies is guaranteed. We find that when the quality and cost differences between the firms exactly offset each other, demand uncertainty causes equilibrium outcomes in capacities to become asymmetric. Without demand uncertainty, only a symmetric equilibrium can be established. This difference between stochastic and deterministic demand is the main driver behind our finding that if the regulator ignores the stochastic nature of demand, regulation lowers welfare for a large range of parameters, that is for approximately 10 per cent of the plausible parameter space.

Keywords: Price competition; Capacity choice; Demand uncertainty; Product differentiation; Price dispersion (search for similar items in EconPapers)
JEL-codes: D43 L11 L13 (search for similar items in EconPapers)
Date: 2012-10-26, Revised 2014-02-20
New Economics Papers: this item is included in nep-com, nep-ind, nep-mic and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20120113

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