Price Setting Supergames with Capacity Constraints

This paper develops supergame theory for price setting oligopoly where firms produce perfect substitutes.- Results are: First price setting supergame equilibria may support higher industry price and lower industry output than quantity setting equilibria even when there are no capacity constraints at the firm level -- contrary to the classical static results of Bertrand and Cournot. Second, the maximum price that can be supported by trigger strategies is not monotonic as a function of the number of firms and capacity of each. Third, properties of industry equilibrium. under free entry but possible tacit collusion on price are developed. We show that entry is likely to decrease welfare if each entrant uses up resources in establishing his firm.