The behavior of an oligopolistic industry in a transition economy is analyzed, assuming that the firms are labor-managed and the economy is open to international trade. The output of these firms is assumed to be of lower quality than the output of Western firms. Cournot equilibrium in the presence of bottlenecks is derived. Such bottlenecks may be particularly damaging because firms respond by cutting exports disproportionately. This may explain why countries such as those in the former Soviet Union, which have faced serious supply bottlenecks, have failed to develop exports, while the economies of Central Europe, where materials are more freely available, have seen rapid export growth.J. Comp. Econom., June 1999, 27(2), pp. 295-317. University of Wales, Swansea, United Kingdom; London Business School, London NW1 4SA, United Kingdom; and Heriot-Watt University, Edinburgh, United Kingdom. © 1999 Academic Press.