Multiregional Oligopoly with Capacity Constraints
Forthcoming in Management Science
47 Pages Posted: 3 Dec 2018 Last revised: 7 Jul 2020
Date Written: June 6, 2020
We develop a model of Cournot competition between capacity-constrained firms that sell a single good to multiple regions. We provide a novel characterization for the unique equilibrium allocation of the good across regions and design an algorithm to compute it. We show that a reduction in transportation costs by a firm may negatively impact the profit of all firms and reduce aggregate consumer surplus if such a firm is capacity constrained. Our results imply that policies promoting free trade may have unintended consequences and reduce aggregate welfare in capacity-constrained industries.
Keywords: Cournot competition, oligopoly, networks, capacity constraints, non-cooperative games, welfare
JEL Classification: C72, D21, D43, F12, H25, L13
Suggested Citation: Suggested Citation