Oligopolistic Equilibrium and Financial Constraints

We model a dynamic duopoly in which firms can potentially drive their rivals from the market (bankrupt them). A consequence is that, for some range of parameters, the static Cournot equilibrium outcome cannot be sustained in an infinitely dynamic setting. In those cases, there is a Markov perfect equilibrium in mixed strategies in which one firm will eventually be driven from the market with probability one. We consider the consequences of potential bankruptcy on the set of outcomes supportable via tacit collusion, showing the set can be different than in the absence of bankruptcy. We show that total payoff in the maximum collusive outcome is greater under bankruptcy consideration than in the absence of bankruptcy.