Endogenous Choice of Capacity and Product Innovation in a Di¤erentiated Duopoly¤

We model a symmetric duopoly where ...rms choose whether to be quantity setters or price setters by deciding the optimal capacity; undertake R&D activity to determine the degree of di¤erentiation; and ...nally compete in the market. Two games are proposed, where investment decisions follow di¤erent sequences. We assess price and quantity decisions, ...nding a set of equilibria where the choice of the market variable is a¤ected by both technological commitments. As a result, the acquired wisdom that quantity setting is a dominant strategy for ...rms, while price setting is a dominant strategy from a social standpoint, may not be con...rmed. J.E.L. classi...cation: D43, L13, O31