Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Thursday, November 27, 2008

Cournot Duopoly When the Competitors Operate Multiple Production Plants

Posted by D. Daniel Sokol

Fabio Tramontana (Università di Urbino - Economics), Laura Gardini (Università di Urbino - Economics), and Tönu Puu (CERUM, Umeå University) discuss Cournot Duopoly when the Competitors Operate Multiple Production Plants in their latest paper.

ABSTRACT: This article considers a Cournot duopoly under an isoelastic demand function and cost functions with built-in capacity limits. The special feature is that each fi…rm is assumed to operate multiple plants, which can be run alone or in combination. Each …firm has two plants with different capacity limits, so each has three cost options, the third being to run both plants, dividing the load according to the principle of equal marginal costs. As a consequence, the marginal costs functions come in three disjoint pieces, so the reaction functions, derived on basis of global pro…fit maximization, may also consist of disjoint pieces. This is reflected in a particular bifurcation structure, due to border collision bifurcations, and to particular basin boundaries, related to the discontinuities. It is shown that stable cycles may coexist, and the non-existence of unstable cycles constitutes a new property. We also compare the coexistent short periodic solutions in terms of the resulting real pro…fits.

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