Essays in Bertrand-Edgeworth competition

Thomas Paul Faith, Purdue University

Abstract

This thesis examines the issues of incumbency, entry and trade restrictions in a capacity constrained pricing model. Duopolists compete in a homogeneous good market. The firms are assumed to have constant unit costs of production up to capacity. Consumers' are considered to be atomistic whose preferences generate a linear demand. Finally, demand is assumed to be rationed efficiently between the duopolists. Essay one examines the advantage of incumbency in a sequential capacity choice framework. Simultaneous pricing is assumed to be the form of competition after capacities are chosen. Firms costs are divided between costs of production up to capacity and costs of capacity. While asymmetry in firms' unit costs of production up to capacity is allowed, the unit cost of capacity is assumed to be identical across firms. Pricing tends to be in non-degenerate mixed strategies when capacity is cheap and the incumbent is more efficient, or only slightly less efficient, than the entrant. Otherwise the equilibrium price lies somewhere between the prices obtained in the standard Cournot and Stackelberg models. The outcome is identical to that of the Stackelberg model when the cost of capacity is large. Also, cases are found in which a firm's equilibrium capacity increases as the unit cost of capacity increases. Essay two extends the analysis of essay one by incorporating a lump-sum fixed cost into the firms' cost structure. Support is found for the existence of entry detering behaviour that involves excess capacity in a subgame perfect equilibrium. Depending on the size of the fixed cost excess capacity may be used to produce or held idle as a credible threat against entry. Essay three examines the effect of quotas and tariffs on the outcome of an imperfectly competitive market. It is found that price competition tends to intensify under a capacity reducing quota when the foreign firm is larger and under a tariff when the foreign firm is smaller.

Degree

Ph.D.

Advisors

Kovenock, Purdue University.

Subject Area

Economics|Economic theory

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