Coalition-proof supply function equilibria in oligopoly

Abstract

In an industry where firms compete via supply functions, the set of equilibrium outcomes is large. If decreasing supply functions are ruled out, this set is reduced significantly, but remains large. Specifically, the set of prices that can be sustained by supply function equilibria is the interval between the competitive price and the Cournot price. In sharp contrast, when the number of firms is above a threshold we identify (e.g., three if demand is linear), only the Cournot outcome can be sustained by a coalition-proof supply function equilibrium.