On the equivalence of quantity competition and supply function competition with sunk costs

Michał Król ()
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Michał Król: The University of Manchester

International Journal of Game Theory, 2017, vol. 46, issue 2, No 8, 475-486

Abstract: Abstract This paper considers competition in supply functions in a homogeneous goods market in the absence of cost or demand uncertainty. In order to commit to a supply schedule, firms are required to build sufficient capacity to produce any quantity that may be prescribed by that schedule. When the cost of extra capacity (given the level of sales) is strictly positive, any Nash equilibrium outcome of supply function competition is also a Nash equilibrium outcome of the corresponding Cournot game, and vice-versa. Conversely, when the cost-savings from reducing output (given the capacity level) are sufficiently small, any outcome of iterated elimination of weakly dominated strategies in the supply function game is also an outcome of the same process in Cournot, and vice-versa.

Keywords: Cournot game; Sunk costs; Supply functions (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1007/s00182-016-0542-x

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