CAPACITY AND COMPETITION - EMPIRICAL-EVIDENCE ON UK PANEL-DATA

Following Kreps and Scheinkman [1983] it is common to view the differe nce between Cournot and Bertrand competition as depending on productio n capacity. Bertrand undercutting is only feasible if firms have capac ity to serve the market gained. If firms are capacity constrained, the Cournot model is more appropriate. This paper tests the capacity and competition idea by looking at the relationship between profits and ca pacity constraints; if capacity constrained firms become more Cournot- like, it should be positive. Using survey data on capacity constraints merged into a panel industry data set for the UK we find a robust pos itive relationship.