Oligopolistic Equilibrium and Financial Constraints

Abstract:     
In this paper we provide a model of dynamic oligopoly in which fi…rms take into account the fi…nancial constraints of all …firms. The study of the equilibria of our dynamic game leads to the concept of Bankruptcy-Free outputs (BF) in which no …firm can drive another fi…rm to bankruptcy without becoming bankrupt itself. For a duopoly with sufficiently patient fi…rms all equilibria yield BF outputs. When there are more than two fi…rms, outputs other than BF can be sustained as equilibria but the set of BF outputs is still useful in explaining the shape of the equilibrium set. Cournot one-shot equilibrium and joint pro…t maximization are more difficult to sustain as equilibria of our game than under the standard repeated games.

Number of Pages in PDF File: 30

Keywords: Financial Constraints, Bankruptcy, Firm Behavior, Dynamic Games

JEL Classification: D2, D4, L1, L2

working papers series