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Relaxing Bertrand competition: capacity commitment beats quality differentiation

Nicolas Boccard () and Xavier Wauthy

No 1999056, CORE Discussion Papers from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: Both product differentiation through quality and capacity commitment have been shown to relax price competition. However, they have not been considered simultaneously. To this end we consider a three stage game where firms choose quality then commit to capacity and finally compete in price. We show that in equilibrium, firms differentiate their products less than if they were not able to commit to limited capacities. This is because they are able to enjoy Cournot profits at the stage where capacity are chosen. Furthermore if the cost of quality is low, capacity pre-commitment completely eliminates the incentives to differentiate

Keywords: Vertical Differentiation; Capacity; Bertrand Competition (search for similar items in EconPapers)
JEL-codes: L13 (search for similar items in EconPapers)
Date: 1999-10-01
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