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Capacity Constraints and Investment Decisions under Cournot Competition

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Author Info
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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Publisher 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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Related research
Keywords: cartel Cournot capacity duopoly investment

Find related papers by JEL classification:
L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L19 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Other

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