Capital Pre-commitment and Competition in Supply Schedules

Abstract

Although the Cournot and Bertrand equilibrium concepts have dominated economic analysis of oligopoly problems, neither has a compelling theoretical rationale. However, notions of capacity commitment have been used to rationalize the Cournot equilibrium. At the same time, the idea of competition in supply schedules under uncertainty has been used by Klemperer and Meyer to derive an equilibrium concept intermediate between Cournot and Bertrand. In this paper, we combine these two approaches and show that under the assumptions of Cobb-Douglas technology and constant elasticity demand, an equilibrium in markups can result.