Endogenous Timing of Investments Yields Modified Stackelberg Outcomes

Mats A. Bergman ()
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Mats A. Bergman: Dept. of Economics, Stockholm School of Economics, Postal: P.O. Box 6501, SE-113 83 Stockholm, Sweden

No 272, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: This paper deals with capacity constrained price competition in a duopoly model. The model resembles that in Kreps and Scheinkman (1983), but the timing of the investment/capacity choice is endogenous. In equilibrium, one of the firms will invest to become the Stackelberg leader, although the ratio between the leader's and the follower's capacities is smaller than in the standard Stackelberg outcome. Capacity is built too early, resulting in welfare losses. The leader and the follower will earn equal profits, except when capacity costs are small.

Keywords: Bertrand; Cournot; Stackelberg; strategic investment; excess capacity; games of timing; endogenous entry; rent equalization. (search for similar items in EconPapers)
JEL-codes: D43 L13 (search for similar items in EconPapers)
Pages: 27 pages
Date: 1998-10-22
New Economics Papers: this item is included in nep-mic and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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