Bertrand–Edgeworth competition with substantial horizontal product differentiation.

Since Kreps and Scheinkman's seminal article (1983) a large number of papers have analyzed capacity constraints' potential to relax price competition. However, the majority of the ensuing literature has assumed that products are either perfect or very close substitutes. Therefore very little is known about the interaction between capacity constraints and local monopoly power. The aim of the present paper is to shed light on this question using a standard Hotelling setup. The high level of product differentiation results in a variety of equilibrium firm behavior and it generates at least one pure-strategy equilibrium for any capacity level. • The aim of the present paper is to shed light on the interaction between capacity constraints and local monopoly power using a standard Hotelling setup. • Substantial horizontal product differentiation results in a variety of equilibrium firm behavior and it generates at least one pure-strategy equilibrium for any capacity level. • The existence of pure-strategy equilibria for every capacity pair is in stark contrast with most of the literature on capacity-constrained pricing. [ABSTRACT FROM AUTHOR]