The Strategic Effects of Batch Processing

We study a duopoly game in which firms commit to a batch technology before competing in sales quantities. Adopting a batch technology requires the quantity produced to equal an integer number of batches and allows sales to be less than production. When larger batch sizes lower unit production costs (as in the U.S. airline industry with its economies of density), subgame perfect equilibrium sales quantities are unique and more competitive than the Cournot equilibrium quantities of a one-shot game with continuous total cost functions. When larger batch sizes yield higher unit costs, equilibrium production can exceed equilibrium sales.