Multiregional Oligopoly with Capacity Constraints
39 Pages Posted: 3 Dec 2018 Last revised: 23 Jan 2019
Date Written: January 21, 2019
We develop a model of Cournot competition between capacity-constrained firms that sell a single good to multiple regions. We characterize the unique equilibrium allocation of the good across regions and provide a convergent algorithm for computing it. We show that a reduction in transportation costs may negatively impact the overall consumer welfare if the impacted firm is capacity constrained. Our results imply that policies promoting free trade may have unintended consequences and reduce consumer surplus in capacity-constrained industries. We calibrate our model to the international market of fertilizers and show that the model accurately predicts prices across regions and over time.
Keywords: Cournot competition, oligopoly, networks, capacity constraints, non-cooperative games, consumer welfare
JEL Classification: C72, D21, D43, F12, H25, L13
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