Oligopolistic Equilibrium and Financial Constraints

• Authors: Yosuke Yasuda, Luis C. Corchón and Carmen Beviá.
• BSE Working Paper: 547 | September 15
• Keywords: Financial constraints , bankruptcy , Firm Behavior , Dynamic Games
• JEL codes: D2, D4, L1, L2
• Financial constraints
• bankruptcy
• Firm Behavior
• Dynamic Games

In this paper we present a model of oligopoly and financial constraints. We study allocations which are bankruptcy-free (BF) in the sense that no firm can drive another firm to bankruptcy without becoming bankrupt. We show how such allocations can be sustained as an equilibrium of a dynamic game. When there are two firms, all equilibria yield BF allocations. When there are more than two firms, allocations other than BF can be sustained as equilibria but in some cases the set of BF allocations still useful in explaining the shape of equilibrium set.