Cournot Competition and Scale Economies in Capacity

11 Pages Posted: 26 May 2011

See all articles by Michael L. Stern

Michael L. Stern

Auburn University; Phoenix Center for Advanced Legal & Economic Public Policy Studies

Thomas Randolph Beard

Auburn University - Department of Economics

Date Written: February 17, 2011

Abstract

The Cournot model remains the most important and widely-applied theoretical model of strategic competition, and countless variations on the Cournot theme have been published in the economics literature. This working paper extends the development of the Cournot framework to incorporate a special form of firm input which is limitational for the production of output. Firms are taken to be capacity-constrained by their holdings of this input, and they use ordinary capital and labor inputs to produce output at or below their effective constraint. Motivated by the technical features of radio spectrum necessary for the delivery of various sorts of wireless services, we assume that the maximal output rate of any firm is a convex, increasing function of its holding of the limiting factor. We analyze Cournot equilibria for key industry configurations, and demonstrate that, under such circumstances, industry output rates and consumer welfare may be increasing in the level of industry concentration. The analysis could be applicable to public policy formulation in industries that operate under potentially binding collective capacity constraints.

Keywords: Cournot Model, Capacity Constraint, Economies of Scale

JEL Classification: L00

Suggested Citation

Stern, Michael L. and Beard, Thomas Randolph, Cournot Competition and Scale Economies in Capacity (February 17, 2011). Available at SSRN: https://ssrn.com/abstract=1851788 or http://dx.doi.org/10.2139/ssrn.1851788

Michael L. Stern (Contact Author)

Auburn University ( email )

415 West Magnolia Avenue
Auburn, AL 36849
United States

Phoenix Center for Advanced Legal & Economic Public Policy Studies

5335 Wisconsin Avenue, NW
Suite 440
Washington, DC 20015
United States

Thomas Randolph Beard

Auburn University - Department of Economics ( email )

415 W. Magnolia
Auburn, AL 36849-5242
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
121
Abstract Views
662
rank
230,395
PlumX Metrics