Inducing Efficiency in Oligopolistic Markets with Increasing Returns to Scale

Abhijit Sengupta () and Yair Tauman ()

Department of Economics Working Papers from Stony Brook University, Department of Economics

Abstract: We consider a Cournot Oligopoly market of firms possessing increasing returns to scale technologies. It is shown that an external regulating agency can increase total social welfare without running a deficit. It offers to subsidize one firm an amount which depends on the output level of that firm. The firms bid for this contract and the regulator collects the highest bid and subsidizes the highest bidding firm. It is shown that there exists a subsidy schedule such that (i) The regulator breaks even (namely the winning bid equals the total subsidy) (ii) The winning firm obtains zero net profit 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 off and total welfare improves.

Keywords: Regulation; Oligopoly; Increasing Returns (search for similar items in EconPapers)
JEL-codes: D43 H21 L11 L13 L51 (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-mic and nep-pbe
References: View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Inducing efficiency in oligopolistic markets with increasing returns to scale (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:nys:sunysb:04-05

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