THE CHOICE OF CAPACITY IN MIXED DUOPOLY UNDER DEMAND UNCERTAINTY *

We analyze the capacity choice of firms under demand uncertainty in a mixed duopoly market consisting of one private firm and one public firm. We define a two‐stage game where firms choose capacity in the first stage without knowing which state of Nature is going to be realized, and output in the second stage knowing which state is realized. We address the question of maintaining over and under capacity in the equilibrium as a strategic device; and show that both symmetric and asymmetric outcomes can be realized.