Oligopolistic Equilibrium and Financial Constraints

35 Pages Posted: 11 Apr 2011 Last revised: 3 Jul 2019

See all articles by Carmen Bevia

Carmen Bevia

Universidad de Alicante

Luis C. Corchón

Universidad Carlos III de Madrid - Department of Economics

Yosuke Yasuda

Osaka University - Graduate School of Economics

Date Written: December 8, 2018

Abstract

We model a dynamic duopoly in which firms can potentially drive their rivals from the market. A consequence is that, for some ranges of parameters, the static Cournot equilibrium outcome cannot be sustained in an infinitely repeated setting. In those cases, there is a Markov perfect equilibrium in mixed strategies in which one firm will eventually be driven from the market with probability one. The presence of potential bankruptcy makes the set of outcomes supportable via tacit collusion different than in the absence of bankruptcy. We show that producer surplus in the maximum collusive outcome is greater under bankruptcy consideration, since the outcome maximizing joint profits is skewed in favor of more efficient firm. Our numerical simulations illuminate that consumer surplus and social welfare also increase in many cases, although those welfare effects are ambiguous in general.

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

JEL Classification: D2, D4, L1, L2

Suggested Citation

Bevia, Carmen and Corchón Diaz, Luis Carlos and Yasuda, Yosuke, Oligopolistic Equilibrium and Financial Constraints (December 8, 2018). Available at SSRN: https://ssrn.com/abstract=1806055 or http://dx.doi.org/10.2139/ssrn.1806055

Carmen Bevia

Universidad de Alicante ( email )

Campus de San Vicente, sn
Alicante, 03690
Spain

Luis Carlos Corchón Diaz

Universidad Carlos III de Madrid - Department of Economics ( email )

Calle Madrid 126
Getafe, 28903
Spain

Yosuke Yasuda (Contact Author)

Osaka University - Graduate School of Economics ( email )

1-7 Machikaneyama
Toyonaka, Osaka, 560-0043
Japan

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