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Capacity Constraints and Investment Decisions under Cournot Competition

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  • Claudia Halabí

    (Escuela de Ingenia Comercial, Universidad Santo Tomas, Santiago, Chile)

  • David R. Kamerschen

    (University of Georgia, USA)

Abstract

This paper analyses how the equilibrium is affected when adding investment decisions and capacity constraints to the traditional Cournot duopoly model. Authors investigate a multiperiod setting with two firms taking investment decisions in every period. We prove that under these circumstances the Cournot equilibrium is unstable and the tendency is to a cartel structure in the industry. However, this behavior is not necessarily cooperative or subject to a tacit agreement. It is optimising for the duopolists to cut down the amount produced in spite of the behavior of the other firm until they reach the monopoly equilibrium.

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Bibliographic Info

Article provided by Faculty of Economics and Business, University of Zagreb in its journal Zagreb International Review of Economics and Business.

Volume (Year): 9 (2006)
Issue (Month): 2 (November)
Pages: 1-11

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Handle: RePEc:zag:zirebs:v:9:y:2006:i:2:p:1-11

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Keywords: cartel; Cournot; capacity; duopoly; investment;

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