Econometrica: Sep, 1981, Volume 49, Issue 5

Nash Equilibrium and the Industrial Organization of Markets with Large Fixed Costs

https://doi.org/0012-9682(198109)49:5<1149:NEATIO>2.0.CO;2-J
p. 1149-1172

Sanford J. Grossman

Cournot-Nash models of free entry into industries with large fixed costs yields equilibria with only a few operating firms, and each firm has some monopoly power. I consider a model where each firm's strategy is a function q(P) which specifies how much it will supply at each price. Unlike in Cournot models, the competitive equilibrium (where it exists) is always a Nash equilibrium in supply function strategies, and under weak assumptions it is the only equilibrium. This permits a Nash equilibrium model of the threat of entry as a deterrent to the exercise of monopoly power by operating firms.