A Dynamic Model of Cournot Competition for an Oligopolistic Market

This paper studies firms’ dynamic interaction in a Cournot market. In each period of the game, the firm decides whether to make a stochastic positioning investment (establishing or maintaining its position in market competition). The market demand is also stochastic (high or low). By adopting symmetric Market perfect Nash equilibrium, firms choose strategies to maximize the discounted present value of cash flow. By considering the cases with one, two, and three active firms in the market, respectively, we present the stage game market outcome, show the transition probabilities, find the steady state of the system, and discuss the speed of convergence. Our work allows for two types of uncertainty in firms’ interactions, which contribute to the dynamic oligopoly literature.

Horizontal Mergers in a Dynamic Cournot Market: Solving the Free Riding Issue Without Efficiency Gains

We discuss horizontal mergers in a linear, homogeneous, symmetric Cournot market where the new entity repeatedly competes with outside firms over an indefinite horizon and efficiency gains are ruled out. If the degree of collusion among the outside firms is large enough, then, despite the large payoff of each outsider, we obtain output configurations solving both the profitability and the free riding issues. Such a result requires that mergers involve a sufficiently small number of firms, which is in sharp contrast with the findings in the literature and rationalize the empirical fact that relatively small mergers, even in absence of synergies, do actually occur and that, although outside firms may benefit from the merger of their rivals, insiders end up being better off. Finally, we show that merging can often be a more advantageous alternative than a fully collusive agreement, in which, moreover, the free riding component is not solved.

STRATEGIC DELEGATION IN A STACKELBERG GAME WITH MULTIPLE STAGES

We analyze strategic delegation in a Stackelberg model with an arbitrary number, n, of firms. We show that n-1 firms delegate their production decisions and only one firm (the one whose manager is the first mover) does not. The later a manager commits to a quantity, the higher his incentive rate. Letting [Formula: see text] denote the equilibrium payoff of the firm whose manager commits in the ith stage, we show that [Formula: see text]. We also compare the delegation outcome of our game with that of a corresponding Cournot oligopoly and show that managers who commit late (early) are given higher (lower) incentive rates than managers in the Cournot market.