This paper considers a Cournot duopoly model assuming isoelasticdemand and smooth cost functions with built-in capacity limits. Whenthe firms cannot obtain positive profits they are assumed to choosesmall 'stand-by' outputs rather than closing down, in order toavoid substantial fitting up costs when market conditions turn outmore favorable. It is shown that the model provides chaoticbehavior. In particular, the system has positive topological entropyand hence the map is chaotic in the Li-Yorke sense. Moreover, chaosis not only topological but also physically observable.