Externalities and multiple equilibria in Cournot competition

Abstract

<div lang="en" class="abs"><p class="abs_header">Abstract</p><p>Industry-wide externalities have been recognized as important phenomena, and are topics for a considerable body of research. In much of this work emphasis is placed on the relationship between the externality and the existence and properties of multiple equilibria that, subsequently, arise. We introduce an externality into a firm’s unit cost function and study the conditions for multiple equilibria. The existence of such externalities can create situations where strategic complementarities engender multiple equilibria and coordination failures. We provide an example for multiple equilibria. We also relate the existence of multiple equilibria to the magnitudes of price elasticity of demand and the elasticity of unit cost with respect to industry output. We also perform some welfare comparisons between different equilibria.</p></div>