Consumer Choice and Cournot Behavior in Capacity-Constrained Duopoly Competition

Leonard F. Herk

RAND Journal of Economics, 1993, vol. 24, issue 3, 399-417

Abstract: In a two-stage model of duopolistic capacity choice and subsequent price competition, consumer switching costs can deter some consumers from seeking service at a low-price firm that lacks sufficient capacity to serve the entire market. In this setting, firms' residual demand functions are aggregated from the firm-selection decisions of individual consumers based on firms' prices and their induced degrees of service reliability. If consumers are approximately risk neutral with respect to service reliability, then capacity-constrained duopoly competition has a unique, subgame-perfect equilibrium in which firms choose Cournot capacities and prices. The equilibrium robustness of Cournot behavior extends to duopoly markets in which consumer switching costs are induced by subscription pricing.

Date: 1993
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