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Relaxing quality differentiation through capacity limitation: A note
Author(s) -
Wauthy Xavier Y.,
Boccard Nicolas
Publication year - 2017
Publication title -
international journal of economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 11
eISSN - 1742-7363
pISSN - 1742-7355
DOI - 10.1111/ijet.12127
Subject(s) - subgame perfect equilibrium , duopoly , product differentiation , economics , bertrand competition , microeconomics , competition (biology) , mathematical economics , quality (philosophy) , bertrand paradox (economics) , product (mathematics) , strategy , cournot competition , nash equilibrium , oligopoly , game theory , mathematics , ecology , philosophy , geometry , epistemology , biology
We consider a duopoly stage game where an incumbent sells a high‐quality product while enjoying an ample production capacity. We study the quality–capacity best response of an entrant, before price competition takes place. We partially characterize equilibrium prices and payoffs in the corresponding Bertrand–Edgeworth pricing games and show that the entrant tends to rely exclusively on capacity limitation in a subgame perfect equilibrium, thereby showing that vertical differentiation is not robust to Bertrand–Edgeworth competition.