MODELING EQUILIBRIUM REGIONAL INTEGRATION BY ENDOGENISING MARGINAL COST IN THE COURNOT FRAMEWORK

This paper examines the formation of endogenous alliances between local firms and multinational enterprises (MNE), which in turn drives regional integration in the global economy. The proposed model is an extension of the Cournot duopoly with linear demand, in which the cost function is predicated on the size of local alliance that can be interpreted as the scale of operation. The paper also makes a departure by assuming managers are not only motivated by profits, but also by the scale of operation or "empire building". Forward-looking MNEs strategize their current alliance formation activities from whence we derive a Nash equilibrium configuration of regional integration. We demonstrate that the equilibrium can be beset with multiplicity, indeterminacy, fragility, and chaotic regimes.