Price Competition with Capacity Constraint and Imperfect Information


STANĚK Rostislav

Year of publication 2012
Type Article in Proceedings
Conference Proceedings of 30th International Conference Mathematical Methods in Economics
MU Faculty or unit

Faculty of Economics and Administration

Field Economy
Keywords bertrand competition; imperefect information; capacity constraint; mixed-strategy equilibrium
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Description Kreps-Sheinkman model introduces a capacity choice into the model of price competition. It shows that in the context of a one-shot game, the environment in which oligopolists make capacity decisions and then post prices for their products has the same Nash equilibrium as the environment in which oligopolists make output decisions and sell their output at market clearing prices. The aim of this paper is to investigate the robustness of this claim. I consider the two-stage game where firms make capacity decision rst and then compete in prices subject to their supply limits. Contrary to Kreps and Sheinkman, I assume that firms have imperfect information about their rival's capacity choice. I show that in this case the Cournot equilibrium conclusion does not hold, because the model has no pure strategy equilibrium. Moreover, the mixed strategy equilibrium has a surprising property. Expected market price increases when there are more firms in the market. This conclusion holds for surplus-maximizing as well as proportional rationing rule.
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