Price Interventions in Cournot Oligopoly with a Dominant Firm

Abstract

We study a dominant firm Cournot oligopoly, with one low-cost firm and one or more high-cost firms. If equilibrium is interior, with all firms producing positive quantity, a reallocation of production relative to the equilibrium point, such that the low-cost firm produces more, while the high-cost firms produce less, can increase consumers' surplus, as well as joint firm profit. A price intervention (either a price floor or a fixed price) may help achieve such an improvement.

Keywords: dominant firm, regulation, asymmetric Cournot oligopoly, price interventions

JEL Classification: D43, D61, L13, L51