A DYNAMIC ENTRY AND PRICE GAME WITH CAPACITY INDIVISIBILITY. (13th April 2012)

• Record Type: Journal Article
• Authors: De Francesco, Massimo A.
• Is Part Of: Bulletin of economic research. Volume 66:Number 4(2014:Oct.)
• Page Start: 406
• Page End: 419
• Publication Date: 2012-04-13
• Subjects: Economics -- Periodicals; Great Britain -- Economic conditions -- Periodicals; 330.05
• DOI: 10.1111/j.1467-8586.2012.00435.x
• Languages: English
• ISSNs: 0307-3378

Abstract

<abstract abstract-type="main"> <title>ABSTRACT</title> <p>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.</p> </abstract>