Relaxing quality differentiation through capacity limitation: A note

Abstract

We consider a duopoly stage game where an incumbent sells a high-quality product while enjoying an ample production capacity. We study the quality-capacity best response of an entrant, before price competition takes place. We partially characterize equilibrium prices and payoffs in the corresponding Bertrand-Edgeworth pricing games and show that the entrant tends to rely exclusively on capacity limitation in a subgame perfect equilibrium, thereby showing that vertical differentiation is not robust to Bertrand-Edgeworth competition