Cournot Competition and Scale Economies in Capacity

Abstract

The Cournot model remains the most important and widely-applied theoretical model of strategic competition, and countless variations on the Cournot theme have been published in the economics literature. This working paper extends the development of the Cournot framework to incorporate a special form of firm input which is limitational for the production of output. Firms are taken to be capacity-constrained by their holdings of this input, and they use ordinary capital and labor inputs to produce output at or below their effective constraint. Motivated by the technical features of radio spectrum necessary for the delivery of various sorts of wireless services, we assume that the maximal output rate of any firm is a convex, increasing function of its holding of the limiting factor. We analyze Cournot equilibria for key industry configurations, and demonstrate that, under such circumstances, industry output rates and consumer welfare may be increasing in the level of industry concentration. The analysis could be applicable to public policy formulation in industries that operate under potentially binding collective capacity constraints.