Capacity coordination in a duopoly with perfect cournot complements

Abstract

We study capacity coordination in a dynamic duopoly with perfect Cournot complements where firms face investment adjustment costs when choosing their production capacities. We show that optimal capacities must become identical from a certain date on. We perform a numerical analysis of the optimal investment and capital paths and the optimal date at which capacities become equal. We find that eliminating overcapacity does not always mean decreasing the highest initial capacity (this is especially true when the firm with the lowest initial capacity has the highest depreciation rate). Moreover, it is possible that the investment of the firm with the lowest initial capacity is non-monotonic.