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A general model of price competition with soft capacity constraints

Cabon-Dhersin Marie-Laure () and Nicolas Drouhin ()
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Cabon-Dhersin Marie-Laure: Université de Rouen Normandie ; CREAM

No 2017-56, Working Papers from Center for Research in Economics and Statistics

Abstract: We propose a general model of oligopoly with firms relying on a two factor production function. In a first stage, firms choose a certain fixed factor level (capacity). In the second stage, firms compete on price, and adjust the variable factor to satisfy all the demand. When the factors are substitutable, the capacity constraint is "soft", implying a convex cost function in the second stage. We show that there is a unique equilibrium prediction in pure strategies, whatever the returns to scale, characterized by a price that increases with the number of firms up to a threshold. The main propositions are established under the general assumption that the production function is quasi-concave but the paper provides a general methodology allowing the model to be solved numerically for special parametrical forms.

Keywords: price competition; tacit collusion; convex cost; capacity constraint; limit pricing strategy; returns to scale (search for similar items in EconPapers)
JEL-codes: L13 D43 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-ind and nep-mic
Date: 2017-12-13
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Working Paper: A general model of price competition with soft capacity constraints (2019) Downloads
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