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The Hotelling Model with Capacity Precommitment

Nicolas Boccard () and Xavier Wauthy

No 1997030, Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: We consider the two-stage game proposed by Kreps and Scheinkman (83) in the address-model of horizontal differentiation developed by Hotelling. Firms choose capacities in the first stage and then compete in prices. We show that price competition is drastically softened since in almost all subgame perfect equilibria firms behave as if they were an integrated monopolist i.e., they choose capacities which exactly cover the market, so that there is no room for price competition. If furthermore the installation cost for capacity is one fourth of the transportation or more, this result stands for all SPE. Like Kreps and Scheinkman, we show that the Cournot allocations coincide with the SPE allocations of our game form. Finally, our analysis provides an interesting treatment of mixed strategy equilibria which is quite new in the literature.

Keywords: Hotelling; capacity; price competition (search for similar items in EconPapers)
JEL-codes: D43 F13 L13 (search for similar items in EconPapers)
Pages: 27
Date: 1996-12-01, Revised 1997-11
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Working Paper: The hotelling model with capacity precommitment (1997) Downloads
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