Inducing Efficiency in Oligopolistic Markets with Increasing Returns to Scale

Posted: 14 Feb 2009 Last revised: 3 Nov 2012

See all articles by Abhijit Sengupta

Abhijit Sengupta

Surrey Business School, University of Surrey

Yair Tauman

Tel Aviv University - Faculty of Management; SUNY at Stony Brook University, College of Arts and Science, Department of Economics

Date Written: February 13, 2009

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

Suggested Citation

Sengupta, Abhijit and Tauman, Yair, Inducing Efficiency in Oligopolistic Markets with Increasing Returns to Scale (February 13, 2009). Mathematical Social Sciences, 62(2), 2011., Available at SSRN: https://ssrn.com/abstract=1342345 or http://dx.doi.org/10.2139/ssrn.1342345

Abhijit Sengupta (Contact Author)

Surrey Business School, University of Surrey ( email )

Guildford, Surrey GU2 7XH
United Kingdom

Yair Tauman

Tel Aviv University - Faculty of Management ( email )

P.O. Box 39010
Ramat Aviv
Tel Aviv 69972
Israel

SUNY at Stony Brook University, College of Arts and Science, Department of Economics

Stony Brook, NY 11794
United States

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