Multiregional Oligopoly with Capacity Constraints
Humoud Alsabah, Benjamin Bernard, Agostino Capponi, Garud Iyengar, Jay Sethuraman
Management Science · 2021 · Volume 67 · Issue 8
Abstract
We develop a model of Cournot competition between capacity-constrained firms that sell a single good to multiple regions. We provide a novel characterization for the unique equilibrium allocation of the good across regions and design an algorithm to compute it. We show that a reduction in transportation costs by a firm may negatively impact the profit of all firms and reduce aggregate consumer surplus if such a firm is capacity constrained. Our results imply that policies promoting free trade may have unintended consequences and reduce aggregate welfare in capacity-constrained industries. This paper was accepted by David Simchi-Levi, revenue management and market analytics.
Keywords
Cournot competition, oligopoly, networks, capacity constraints, noncooperative games, welfare
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