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Capacity Constraints and Investment Decisions under Cournot Competition

Claudia Halabi and David R. Kamerschen
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David R. Kamerschen: University of Georgia, USA

Zagreb International Review of Economics and Business, 2006, vol. 9, issue 2, 1-11

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.

Keywords: cartel; Cournot; capacity; duopoly; investment (search for similar items in EconPapers)
JEL-codes: L10 L11 L12 L13 L19 (search for similar items in EconPapers)
Date: 2006
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