DYNAMIC CAPACITY CHOICE IN A BERTRAND-EDGEWORTH-FRAMEWORK

We examine the implications of replacing the Cournot market clearing a ssumption with Bertrand-Edgeworth behavior when production is time-con suming. The benchmark is Saloner's result that when two firms simultan eously choose quantities in each of two periods before the market clea rs, every point on the outer envelope of the reaction functions betwee n the Stackelberg outcomes is sustainable in equilibrium (Saloner, 198 7). We demonstrate that in a symmetric Bertrand-Edgeworth duopoly, for small capacity costs, except for the leader-follower points, none of the points on the outer envelope of the best responses lying in the mi xed strategy region are sustainable in equilibrium. (C) 1998 Elsevier Science S.A.