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‘Everything must go!’- Cournot as a Stable Convention within Strategic Supply Function Competition

By  |  November 2, 2012

Posted by D. Daniel Sokol

Michal Krol (Manchester) explains ‘Everything must go!’- Cournot as a Stable Convention within Strategic Supply Function Competition

ABSTRACT: This paper considers competition in supply functions in a homogeneous goods market. It demonstrates that when Â…rms are few, production costs rise steeply and are largely sunk, a restriction of the playersÂ’strategy sets equivalent to Cournot competi- tion constitutes an instance of the von Neumann-Morgenstern Stable Set. SpeciÂ…cally, any player who believes others will compete à la Cournot (but is ignorant of their exact quantity choices) Â…nds a strategy admissible if and only if it is within her restricted strategy set. In fact, under capacity constraints Cournot may constitute the unique set-valued solution satisfying these conditions. It also follows that Cournot then fullÂ…lls the ‘preparationÂ’requirement of Voorneveld [2004] and has the three deÂ…ning charac- teristics of the Self-Admissible Set by Brandenburger, Friedenberg, and Keisler [2008].