Long-Run Competition in Capacity, Short-Run Competition in Price, and the Cournot Model
Volume: Volume 17, No. 3
Issue: Autumn 1986
Pages: pp. 404-415
Authors: Carl Davidson and Raymond Deneckere
Title: Long-Run Competition in Capacity, Short-Run Competition in Price, and the Cournot Model
Abstract: In this article we investigate the nature of equilibrium in markets in which firms choose the scale of operation before they make pricing decisions. We analyze a duopoly model in which firms choose their capacities before engaging in Bertrand-like price competition. We demonstrate that the Cournot outcome is unlikely to emerge in such markets and that the equilibrium tends to be more competitive than the Cournot model would predict. In addition, our results indicate a tendency toward asymmetric firm sizes and price dispersion that results from the mixed strategies firms use in equilibrium.
JEL Classification
Microeconomics Theory of Firm and Industry under Imperfectly Competitive Market Structures (0226)
Market Structure: Industrial Organization and Corporate Strategy (6110)