Capacity choice in a large market.

Abstract

We analyze endogenous capacity formation in a large frictional market with perfectly divisible goods. Each seller posts a price and decides on a capacity. The buyers base their decision on which seller to visit on both characteristics. In this setting we determine the conditions for the existence and uniqueness of a symmetric equilibrium. When capacity is unobservable there exists a continuum of equilibria. We show that the "best" of these equilibria leads to the same seller capacities and the same number of trades as the symmetric equilibrium under observable capacity.