Welfare Changes in the Cournot Setting with an Empirical Application to the Telecommunications Industry

Abstract

This paper characterizes the welfare efficiency of the Cournot equilibrium and provides bounds for the loss in consumer surplus, producer surplus and welfare when the number of firms in the market changes. I only assume that demand is decreasing in price and costs increasing in the quantity produced as long as Cournot equilibrium exists. I show how price, demand and average cost, before and after the number of firms in the market changes, can be used to compute these bounds. I apply these bounds to the Portuguese wireline market and conclude that the welfare loss carried by Portugal Telecom’s monopoly in 2005 reduced significantly when the company was split in 2007.

Keywords: Cournot Equilibrium, Welfare Loss, Telecommunications Industry

JEL Classification: D43, L13