Price competition in a capacity-constrained duopoly (Q1083008)

This paper characterizes the set of Nash equilibria in a model of price- setting duopoly in which each firm has limited capacity, and demand is continuous and decreasing. In general there is a unique equilibrium, so that comparative static exercises are meaningful. The properties of the equilibrium conform with a number of stylized facts. The equilibrium prices are lower, the smaller is demand relative to capacity. When demand is in an intermediate range, the firms used mixed strategies - they randomly hold ''sales''. If capacities are chosen simultaneously, before prices, the set of equilibrium capacities coincides with the set of Cournot quantities.