A Duopoly Model Of Fixed Cost Choice

Charles E. Hegji

New York Economic Review, 2004, vol. 35, issue 1, 44-50

Abstract: Comparison of firms in Cournot and Stackelberg equilibrium is a subject that has received much attention. A universally imposed assumption in most discussions of the Cournot and Stackelberg outcomes is that participants in markets are confronted with given cost structures. In some setups, firms are assumed to have identical costs. In others, firms have different costs. However, the sequence of costs of firms choosing output is fixed, as is the level of costs once the equilibrium is obtained.This assumption is, of course unrealistic, since firms invest considerable time and effort in cost cutting to either increase profit or market share. The purpose of the present paper is to study the impact of cost changes on firms in Cournot and Stackelberg equilibrium. We do this using a model similar that that of Neuman, Weigand, Gross, and Muenter (2001). The model assumes that firms can reduce marginal costs by investing in assets, thereby increasing fixed costs.

Date: 2004
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