Cournot Duopoly With Multi‐period Competition: Inventory as a Coordination Device

Abstract

This paper analyses a Cournot duopoly model with finitely repeated competition. Each firm is allowed to hold inventories for a period. When there are more than two periods, inventory‐holdings encourage firms to take collusive actions. By holding large inventories, a firm can commit to large sales in the next period, giving inventories a strategic value. When a firm deviates from collusion, the strategic value of inventories allows the non‐defecting firm to become the Stackelberg leader in future markets, forcing the defecting firm to become the Stackelberg follower. Collusive sales can be attained with this threat of punishment.