In this section, we characterize Bertrand equilibrium behavior in di1erentiated prod-ucts industry subject to capacity constraints. The bulk of the literature in this area has been theoretical (for an exception see Bresnahan and Suslow, 1989) and focused on homogenous goods industries (Edgeworth, 1897). In modern applications, capacity constraints have been used to address the question of whether above-cost pricing is pro- or counter-cyclical (e.g., Staiger and Wolak, 1992), and to investigate long-run equilibrium in two-stage games where 2rms 2rst invest in capacity, then compete in either price or quantity (e.g., Kreps and Scheinkmam, 1983).