95D01402-59B2-4EBB-BCC4-8F05C62D7FD1.jpeg - GT TO Tutorial Capacity Precommitment(Ch 2 p 44-61 exum p.1 1 Chronological structure 1 Firms simultaneously

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Unformatted text preview: GT & TO Tutorial Capacity Precommitment (Ch. 2 p. 44-61 ) ( exum ) p.1 1 . Chronological structure : 1 Firms ( simultaneously ) decide on their CP - gi 2 set their prices # p. 1 3 Firms realize profits - TT' 2 Solution Procedure [1) Solve for the prices in the and stage, conditional on alternative capacities 2 Solve for optimal capacities in the Ist stage, anticipating the implications for the price competition 3 Solve for optimal prices in the and stage, given the optimal capacity decisions chosen in the $ 1st stage ( 2] ) Capacity - Precommitment model of Kreps & Scheinman (1983) Assumption: " Before setting prices, firms have to install capacities gi , which ave irreversible and observable . The market demand function is D (p ) = 1p . The unit production costs are 0 7 qis qi Loremain below instaked capacity 00 if gi > gi 10 exceed installed capacities if consumer rationing occurs ( what will not be the case in equilibrium ), the efficient rationing rule is applied [D (pi ) - 9; if p: = p; D; (pi) = ( D (pi ) if picpi PA DCP ) Dalpals ( Residual demand function ) P2 92 * DA(PA )...
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