Pricing, Investments and Mergers with Intertemporal Capacity Constraints

Charalambos Christou (), Rossitsa Kotseva () and Nikolaos Vettas ()
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Charalambos Christou: Department of Economics, University of Macedonia
Rossitsa Kotseva: Department of Economics, University of Cyprus, http://www.econ.ucy.ac.cy/index.htm

Discussion Paper Series from Department of Economics, University of Macedonia

Abstract: We set up a duopoly model with dynamic capacity constraints under demand uncertainty. We endogenize the investment decisions of the ?rms, examine their intertemporal pricing behavior, their incentives to merge, as well as the welfare implications of a merger. Whereas under known and constant demand the high capacity ?rm lets its low capacity rival sell out, under demand uncertainty we obtain a rich set of sales patterns. Each unit of available capacity has an option value (or opportunity cost), which depends on both ?rms? capacities, the current demand and the remaining horizon. This option value may be higher when the ?rms act non-cooperatively compared to the case when they merge to form a monopoly. Trade surplus may be higher when a merger takes place, as capacity is more e? ciently managed over time. The prospect of a merger also leads to higher investment levels, as each ?rm wishes to appropriate a higher share of the total surplus. For some levels of the capacity installment cost, a merger that turns the duopoly into a monopoly is welfare improving.

Keywords: dynamic oligopoly; price competition; capacity constraints; inventories; mergers. (search for similar items in EconPapers)
JEL-codes: D43 L13 L22 (search for similar items in EconPapers)
Date: 2009-03, Revised 2009-03
New Economics Papers: this item is included in nep-com and nep-mic
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Related works:
Working Paper: Pricing, Investments and Mergers with Intertemporal Capacity Constraints (2007)
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