Impact of product heterogeneity and soft budget constraint on excess capacity in Chinese energy industry based on the duopoly model

Abstract

ABSTRACT Chinese energy industries are facing serious problems such as excess capacity, homogeneous product, and soft budget constraint. This paper provides a duopoly model to investigate the influence of heterogeneity and soft budget constraint on production capacity decision and internal action mechanism, respectively, under Cournot and Bertrand competitions, which reveals the formation mechanism of excess capacity. We conclude that excess capacity would exist when the products are not wholly heterogeneous under Cournot competition, and the higher level of the soft budget constraint or the more homogeneous the products are, the worse the excess capacity will be. The insufficient capacity would exist provided that products are not wholly heterogeneous under Bertrand competition, and the higher level of soft budget constraint or the more homogeneous the products are, the more insufficient capacity will be. Both soft budget constraint and product heterogeneity mutually affect to decision-making of capacity and output.