IDEAS home Printed from https://ideas.repec.org/p/nys/sunysb/04-05.html
   My bibliography  Save this paper

Inducing Efficiency in Oligopolistic Markets with Increasing Returns to Scale

Author

Listed:
  • Abhijit Sengupta

    ()

  • Yair Tauman

    ()

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.

Suggested Citation

  • Abhijit Sengupta & Yair Tauman, 2004. "Inducing Efficiency in Oligopolistic Markets with Increasing Returns to Scale," Department of Economics Working Papers 04-05, Stony Brook University, Department of Economics.
    • Handle: RePEc:nys:sunysb:04-05
    as

    Download full text from publisher

    File URL: http://www.stonybrook.edu/commcms/economics/research/papers/2004/04-05.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Milgrom,Paul, 2004. "Putting Auction Theory to Work," Cambridge Books, Cambridge University Press, number 9780521536721.
    2. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, May.
    3. Sappington, David E M & Sibley, David S, 1988. "Regulating without Cost Information: The Incremental Surplus Subsidy Scheme," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(2), pages 297-306, May.
    4. Baron, David P & Myerson, Roger B, 1982. "Regulating a Monopolist with Unknown Costs," Econometrica, Econometric Society, vol. 50(4), pages 911-930, July.
    5. Veronika Grimm & Frank Riedel & Elmar Wolfstetter, 2000. "Implementing Efficient Market Structure," Econometric Society World Congress 2000 Contributed Papers 0268, Econometric Society.
    6. Auriol, Emmanuelle & Laffont, Jean-Jacques, 1992. "Regulation by Duopoly," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(3), pages 507-533, Fall.
    7. Klemperer, Paul, 2002. "How (not) to run auctions: The European 3G telecom auctions," European Economic Review, Elsevier, vol. 46(4-5), pages 829-845, May.
    8. Philippe Jehiel & Benny Moldovanu, 2004. "The Design of an Efficient Private Industry," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 516-525, 04/05.
    9. Vogelsang, Ingo, 2002. "Incentive Regulation and Competition in Public Utility Markets: A 20-Year Perspective," Journal of Regulatory Economics, Springer, vol. 22(1), pages 5-27, July.
    10. Guesnerie, Roger & Laffont, Jean-Jacques, 1978. "Taxing price makers," Journal of Economic Theory, Elsevier, vol. 19(2), pages 423-455, December.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Regulation; Oligopoly; Increasing Returns;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nys:sunysb:04-05. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/edstous.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.