Capacity Constraints and Investment Decisions under Cournot Competition

This paper analyses how the equilibrium is affected when adding investment decisions and capacity constraints to the traditional Cournot duopoly model.Authors investigate a multiperiod setting with two firms taking investment decisions in every period.We prove that under these circumstances the Cournot equilibrium is unstable and the tendency is to a cartel structure in the industry.However, this behavior is not necessarily cooperative or subject to a tacit agreement.It is optimising for the duopolists to cut down the amount produced in spite of the behavior of the other firm until they reach the monopoly equilibrium.