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When cost improvements harm consumers

Author

Listed:
  • Nicolas Gruyer

    (LEEA (air transport economics laboratory), ENAC)

  • Philippe Bontems

    (University of Toulouse (INRA, IDEI))

Abstract

This paper demonstrates that in a vertical structure, improving cost efficiency might sometimes be detrimental to consumers, by increasing market price. This is in stark contrast to the standard result in oligopoly theory which suggests that the surplus generated by any efficiency gain in production is shared between firms and final consumers, depending on the degree of market power. These results are applied in contexts such as international trade, diffusion of knowledge and techniques, and government intervention through income support programs.

Suggested Citation

  • Nicolas Gruyer & Philippe Bontems, 2006. "When cost improvements harm consumers," Economics Working Papers 03, LEEA (air transport economics laboratory), ENAC (french national civil aviation school).
    • Handle: RePEc:enc:abcdef:cost3
    Note: Type of Document - pdf; pages: 21.
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    File URL: http://gruyern.free.fr/wpaper/BontemsGruyer.pdf
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    Keywords

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    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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