Reliability improvement and production decision under Cournot competition

We consider two competing manufacturers who are unreliable and exert effort endogenously to improve their reliability within a dynamic decision framework. The manufacturers first decide the optimal level of effort and then input quantities after observing improvement outcomes. We explore the relationship between optimal input quantity and realised reliability, and find that the balance between two effects – price reduction effect and cost reduction effect – plays an important role. When market potential is low, the cost reduction effect dominates the price reduction effect, resulting in that the optimal input quantity increases in the realised reliability. The opposite situation is true when the market potential is high. By further examining the interaction between competition and reliability improvement, we find that the competition reduces the effort level of reliability improvement and this impact increases in the probability of the improvement success. In terms of expected input quantity, the reliability improvement intensifies competition with lower market potential but weakens competition with higher market potential. While in terms of expected output quantity to the market, the improvement behaviour of each competitor always intensifies competition by reducing the output inefficiency caused by random yield.