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Capacity choice in a duopoly with a consumer-friendly firm and an absolute profit-maximizing firm

Yasuhiko Nakamura ()

International Review of Economics & Finance, 2014, vol. 34, issue C, 105-117

Abstract: This paper studies a capacity choice problem in a duopoly with substitutable goods that is composed of one consumer-friendly firm and one standard absolute profit-maximizing firm in the contexts of both quantity competition and price competition with substitutable goods. In this paper, we assume that the consumer-friendly firm maximizes the weighted sum of its absolute profit and consumer surplus. We show that in the quantity competition, for the consumer-friendly firm, under-capacity is chosen when the extent of the importance of consumer surplus to the consumer-friendly firm is high relative to the degree of product differentiation, whereas over-capacity is chosen otherwise. Moreover, we find that in the price competition, the consumer-friendly firm chooses over-capacity when the extent of importance of consumer surplus to the consumer-friendly firm is high relative to the degree of product differentiation, whereas it chooses under-capacity otherwise. Furthermore, regardless of the extent of the importance of consumer surplus to the consumer-friendly firm and the degree of product differentiation, it is shown that in the quantity competition, the absolute profit-maximizing firm chooses over-capacity, whereas in the price competition, it chooses under-capacity.

Keywords: Capacity choice; Consumer-friendly firm; Quantity competition; Price competition; Extent of the importance of consumer surplus (search for similar items in EconPapers)
JEL-codes: D43 L13 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:34:y:2014:i:c:p:105-117

DOI: 10.1016/j.iref.2014.07.004

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