Commitment, flexibility and market outcomes☆

Abstract An n-firm oligopoly model, parametrized by the degree of flexibility of the technology and where firms choose the optimal scale of production (capacity) first and then a competitive stage follows, is presented. It is shown that in (Nash) equilibrium as one moves from non-flexible to flexible technologies the resulting price ranges from the Cournot price to the Bertrand price. Furthermore, if the slope of short run marginal cost is bounded, the order of magnitude of the margin of price over long run unit cost is 1/n2 and the speed of convergence to the efficient outcome as the number of firms grows is, in a finer sense, faster the more flexible is the technology.