Oligopolistic Equilibrium and Financial Constraints

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. * This paper is a merger of two independent papers, "Oligopolistic Equilibrium and Bankruptcy" by Beviá and Corchón and "The Theory of Collusion under Financial Constraints" by Yasuda. The .rst two authors wish to thank to A. Brandenburger, L. Cabral, A. Daughety, M. Katz, F. Maniquet, J. Marín, E. Maskin, A. Nicolo, G. Pérez-Quiros, J. Reinganum, A. Wolinsky and audiences in seminars at NYU, Sydney U., PET 2009 (Galway), SED 2009 (Maastricht), M-SWET 2010 (Madrid) and IAE (Barcelona) for helpful suggestions. The third author wishes to thank to D. Abreu, E. Maskin, and especially P. Bolton for their guidance and to K. Bagwell, M. Kandori, I. Obara and S. Takahashi for useful comments. The first author acknowledges financial support from ECO2008-04756 (Grupo Consolidado-C), SGR2009-419, Barcelona GSE research network and MOVE where she is an affiliated researcher. The second author acknowledges financial support from SEJ2005-06167/ECON.