Inducing Efficiency in Oligopolistic Markets with Increasing Returns to Scale
University of Essex - Essex Business School
Tel 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.
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 ofering 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 prot 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, L51Accepted Paper Series
Date posted: February 14, 2009 ; Last revised: November 3, 2012
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