I wish to thank an anonymous referee, Paul Madden, and various seminar participants for helpful comments and suggestions. The usual disclaimers apply.
A DYNAMIC ENTRY AND PRICE GAME WITH CAPACITY INDIVISIBILITY
Article first published online: 13 APR 2012
© 2012 The Authors. Bulletin of Economic Research © 2012 Board of Trustees of the Bulletin of Economic Research and John Wiley & Sons Ltd
Bulletin of Economic Research
Volume 66, Issue 4, pages 406–419, October 2014
How to Cite
De Francesco, M. A. (2014), A DYNAMIC ENTRY AND PRICE GAME WITH CAPACITY INDIVISIBILITY. Bulletin of Economic Research, 66: 406–419. doi: 10.1111/j.1467-8586.2012.00435.x
- Issue published online: 7 OCT 2014
- Article first published online: 13 APR 2012
- Bertrand-Edgeworth competition;
- capacity indivisibility;
- mixed strategy equilibrium;
Strategic market interaction is here modelled as a two-stage game in which potential entrants choose capacities and next active firms compete in prices. Due to capital indivisibility, the capacity choice is made from a finite grid and there are economies of scale. In the simplest version of the model with a single production technique, the equilibrium turns out to depend on the ratio between the level of total output at the long-run competitive equilibrium and the firm's minimum efficient scale: if that ratio is sufficiently large (the market is sufficiently ‘large’), then the competitive price emerges at a subgame-perfect equilibrium of the capacity and price game; if not, then the firms randomize in prices on the equilibrium path. The role of the market size for the competitive outcome is shown to be even more important if there are several available production techniques.