Equilibrium Vertical Differentiation in a Bertrand Model with Capacity Precommitment

Abstract

Both quality differentiation and capacity commitment have been shown to relax price competition. However, their joint influence on the outcome of price competition has not yet been assessed. In this article, we consider a three stage game in which firms choose quality, then commit to capacity and, finally, compete in price. When the cost of quality is negligible, we show that firms do not differentiate their products in a subgame perfect equilibrium, in other words, capacity precommitment completely eliminates the incentive to differentiate by quality.