Tacit collusion in a dynamic duopoly with indivisible production and cumulative capacity constraints
This paper studies a dynamic, quantity setting duopoly game characterized as follows: Each firm produces an indivisible output over a potentially infinite horizon, facing the constraint that its cumulative production cannot exceed an initially given bound. The environment is otherwise stationary; th...
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| Format: | Working Paper |
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MIT Center for Energy and Environmental Policy Research
2009
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| Online Access: | http://hdl.handle.net/1721.1/50148 |
| _version_ | 1826205670195593216 |
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| author | Loury, Glenn C. |
| author_facet | Loury, Glenn C. |
| author_sort | Loury, Glenn C. |
| collection | MIT |
| description | This paper studies a dynamic, quantity setting duopoly game characterized as follows: Each firm produces an indivisible output over a potentially infinite horizon, facing the constraint that its cumulative production cannot exceed an initially given bound. The environment is otherwise stationary; the remaining productive capacities of the firms at any moment are common knowledge; the firms choose production plans contingent on these capacities which are mutual best responses in every contingency. The resulting Markov Perfect Equilibria are analyzed using a two-dimensional backward induction, and compared with the equilibria which emerge when precommitment to time paths of output is possible. It is shown that the ability to precommit can be disadvantageous; that collusion in Markov Equilibrium is facilitated by the symmetrical placement of the firms; and that having greater capacity confers basic strategic advantage on a firm by enabling it to credibly threaten future production. The model solves an open problem in the theory of exhaustible resource economics by imposing subgame perfection in a resource oligopoly with independent stocks. It also formalizes the intuition that, when indivisibilities are important, tacit coordination of plans so as to avoid destructive competition is facilitated by establishing a convention of "taking turns" - that is, a self-enforcing norm of mutual, alternate forbearance. |
| first_indexed | 2024-09-23T13:16:44Z |
| format | Working Paper |
| id | mit-1721.1/50148 |
| institution | Massachusetts Institute of Technology |
| last_indexed | 2024-09-23T13:16:44Z |
| publishDate | 2009 |
| publisher | MIT Center for Energy and Environmental Policy Research |
| record_format | dspace |
| spelling | mit-1721.1/501482019-04-12T23:30:57Z Tacit collusion in a dynamic duopoly with indivisible production and cumulative capacity constraints Loury, Glenn C. This paper studies a dynamic, quantity setting duopoly game characterized as follows: Each firm produces an indivisible output over a potentially infinite horizon, facing the constraint that its cumulative production cannot exceed an initially given bound. The environment is otherwise stationary; the remaining productive capacities of the firms at any moment are common knowledge; the firms choose production plans contingent on these capacities which are mutual best responses in every contingency. The resulting Markov Perfect Equilibria are analyzed using a two-dimensional backward induction, and compared with the equilibria which emerge when precommitment to time paths of output is possible. It is shown that the ability to precommit can be disadvantageous; that collusion in Markov Equilibrium is facilitated by the symmetrical placement of the firms; and that having greater capacity confers basic strategic advantage on a firm by enabling it to credibly threaten future production. The model solves an open problem in the theory of exhaustible resource economics by imposing subgame perfection in a resource oligopoly with independent stocks. It also formalizes the intuition that, when indivisibilities are important, tacit coordination of plans so as to avoid destructive competition is facilitated by establishing a convention of "taking turns" - that is, a self-enforcing norm of mutual, alternate forbearance. Supported by the Bradley Foundation, the Olin Foundation and the Center for Energy Policy Research, MIT. 2009-12-15T23:53:40Z 2009-12-15T23:53:40Z 1990 Working Paper 90-015 http://hdl.handle.net/1721.1/50148 28596090 Working paper (Massachusetts Institute of Technology. Center for Energy Policy Research) ; MIT-CEPR 90-015. 43 p application/pdf MIT Center for Energy and Environmental Policy Research |
| spellingShingle | Loury, Glenn C. Tacit collusion in a dynamic duopoly with indivisible production and cumulative capacity constraints |
| title | Tacit collusion in a dynamic duopoly with indivisible production and cumulative capacity constraints |
| title_full | Tacit collusion in a dynamic duopoly with indivisible production and cumulative capacity constraints |
| title_fullStr | Tacit collusion in a dynamic duopoly with indivisible production and cumulative capacity constraints |
| title_full_unstemmed | Tacit collusion in a dynamic duopoly with indivisible production and cumulative capacity constraints |
| title_short | Tacit collusion in a dynamic duopoly with indivisible production and cumulative capacity constraints |
| title_sort | tacit collusion in a dynamic duopoly with indivisible production and cumulative capacity constraints |
| url | http://hdl.handle.net/1721.1/50148 |
| work_keys_str_mv | AT louryglennc tacitcollusioninadynamicduopolywithindivisibleproductionandcumulativecapacityconstraints |