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This paper analyzes price competition in the case of two firms operating under constant returns to scale with more than one production factor. Factors are chosen sequentially in a two-stage game generating a soft capacity constraint and implying a convex short-term cost function in the second stage of the game. We show that tacit collusion is the only predictable result of the whole game, that is, the unique payoff-dominant pure strategy Nash equilibrium. Technically, this paper bridges the capacity constraint literature on price competition and that of the convex cost function.
