Prices, capacities and service levels in a congestible Bertrand duopoly

Abstract

We study the duopolistic interaction between congestible facilities that supply perfect substitutes and make sequential decisions on capacities and prices, and compare the results to monopoly and first-best outcomes. At the Nash equilibrium prices and capacities, there is more congestion in the duopoly than in the social optimum. Given our assumptions, monopoly pricing and capacity choices result in the same congestion level as the social optimum. The higher congestion level under duopoly is due to strategic price responses to capacity investments. Moreover, higher marginal costs of capacity may increase duopoly profits. Lastly, when capacity is relatively cheap or demand relatively inelastic, stable asymmetric Nash equilibria may result, where the high-capacity facility offers low time costs at a high price, and the smaller facility offers lower service levels at a lower price. In that case, there is endogenous product differentiation by ex ante identical firms.