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Capacity Constraints and Investment Decisions under Cournot Competition

Author

Listed:
  • 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.

Suggested Citation

  • Claudia Halabí & David R. Kamerschen, 2006. "Capacity Constraints and Investment Decisions under Cournot Competition," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 9(2), pages 1-11, November.
    • Handle: RePEc:zag:zirebs:v:9:y:2006:i:2:p:1-11
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    More about this item

    Keywords

    cartel; Cournot; capacity; duopoly; investment;
    All these keywords.

    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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