DEMAND FLUCTUATIONS AND CAPACITY UTILIZATION UNDER DUOPOLY

This paper studies the impact of uncertain demand on firms' capacity d ecisions when they operate in an oligopolistic environment. We define a two-stage game where firms choose capacity in the first stage withou t knowing which state of Nature is going to realize, and output levels in the second, knowing which state is realized. We prove the existenc e of a symmetric subgame perfect equilibrium at which firms are in exc ess capacity compared with the capacity they would choose in the Courn ot certainty equivalent game.