Oligopolistic Equilibrium and Financial Constraints

33 Pages Posted: 11 Apr 2011 Last revised: 28 Sep 2015

Carmen Bevia

Universidad de Alicante

Luis C. Corchón

Universidad Carlos III de Madrid - Department of Economics

Yosuke Yasuda

Osaka University - Graduate School of Economics; National Graduate Institute for Policy Studies (GRIPS)

Date Written: September 27, 2015

Abstract

We provide a model of dynamic duopoly in which firms take into account the financial 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 firm to bankruptcy without becoming bankrupt itself. We show that, in some cases, Cournot outputs are not a Markovian subgame perfect equilibrium because if these outputs were set, a firm may have incentives to ruin others. In these cases, standard trigger strategies in which collusion is sustained by infinite reversion to Cournot outputs cannot be used. We show that there is a Markov subgame perfect equilibrium in mixed strategies and study its properties. Predation occurs in equilibrium with a positive probability. Finally we adapt the folk theorem to our framework and show that it holds when minimax is taken over the BF outputs

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

JEL Classification: D2, D4, L1, L2

Suggested Citation

Bevia, Carmen and Corchón, Luis C. and Yasuda, Yosuke, Oligopolistic Equilibrium and Financial Constraints (September 27, 2015). 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

National Graduate Institute for Policy Studies (GRIPS) ( email )

7-22-1 Roppongi, Minato-ku
Tokyo, Tokyo 106-8677
Japan

HOME PAGE: http://https://sites.google.com/site/yosukeyasuda/Home

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