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Inducing Efficiency in Oligopolistic Markets with Increasing Returns to ScaleAbhijit SenguptaUniversity of Essex - Essex Business School Yair TaumanTel Aviv University - Faculty of Management; SUNY at Stony Brook University, College of Arts and Science, Department of Economics February 13, 2009 Mathematical Social Sciences, 62(2), 2011. Abstract: We consider a Cournot oligopoly market of firms possessing increasing returns to scale technologies (which may not be identical). It is shown that an external regulating agency can increase total social welfare without running a deficit by of ering to subsidize one firm an amount which depends on the output level of that firm and the market price. The firms bid for this contract, the regulator collects the highest bid upfront and subsidizes the highest bidding rm. It is shown that there exists a subsidy schedule such that (i) The regulator breaks even (ii) The subsidized firm obtains zero net pro t and charges a price equal to its average cost (iii) Every other firm willingly exit the market and (iv) Market price decreases, consumers are better o and total welfare improves.
Keywords: Regulation, Oligopoly, increasing returns JEL Classification: D43, H21, L11, L13, L51 Accepted Paper SeriesDate posted: February 14, 2009 ; Last revised: November 3, 2012Suggested CitationContact Information
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