Capacity and Reaction Functions of Joint-Stock Firms

This paper investigates two-stage competition with two jointstock firms. In the first stage, each firm independently chooses a level of capacity. In the second stage, each firm independently chooses an output. The paper shows that each firm’s reaction function has a kink at its installed capacity level. In addition, the paper considers interactions between a jointstock incumbent and a potential jointstock entrant as well as a pair of established jointstock firms. The paper demonstrates that there exist cases in which the jointstock incumbent can deter entry by the potential jointstock entrant.