Unilateral production restrictions in a dynamic duopoly

This paper examines a dynamic game of exploitation of a productive asset by a doupoly. A closed-loop Nash equilibrium of the game is constructed and used to analyze the effects of a unilateral production restriction. Surprisingly, such unilateral action may result in a decrease of the long-run asset's stock. We also exhibit production restrictions that can result simultaneously in an increase of the asset's stock and the long-run profits of the firm that is being imposed the production restriction. Moreover, a unilateral decrease of the production of one firm can induce its rival to also decrease its production. (C) 2003 Elsevier Inc. All rights reserved.