Sequential Capacity and Price Choices in a Duopoly Model with Demand Uncertainty

Morten Hviid

No 89-09, Discussion Papers from University of Copenhagen. Department of Economics

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.

Keywords: market structure; industrial organization and corporate strategy (search for similar items in EconPapers)
Date: Written
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Published in: Journal of Economics/Zeitschrift für Nationalokonomie, 1990, 51(2) pp 121-144

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Journal Article: Sequential capacity and price choices in a duopoly model with demand uncertainty (1990)
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