Consider a Cournot oligopoly with three firms i = 1; 2; 3. All firms have the same constant marginal cost c = 1. The inverse demand function of the market is given by P = 9-Q, where P is the market price, and Q = (q₁+ q₂+q₃) is the aggregate output.

suppose these three firms play a 2-stage game. In stage 1, they produce capacities q₁^-q₂^- and q₃^-, which are equal to the Nash equilibrium quantities 2, 2, and 2. In stage 2, they simultaneously decide on their p₁, p₂ and p₃. The marginal cost for each firm to sell up to capacity is 0. It is impossible to sell more than capacity. The residual demand for firm i is

9 - Pi - iti li if pi > pi for all j # i Di (Pi, P-i) = 9-Pi 3 if pi = p; for all j # i . 9 - Pi if pi