Jingang Zhao

"A Characterization for the Negative Welfare Effects of Cost Reduction in Cournot Model"

JEL codes: D43, L13
Keywords: Cost reduction, oligopoly, technology spillover, welfare effect

Abstract: This paper characterizes the welfare effects of cost reduction in Cournot model with linear costs. Under linear demand, a small reduction in a small firmīs marginal cost reduces social welfare if and only if its market share is less than 1/(2n+2)or equivalently, its marginal cost exceeds a critical level determined by the market. A large cost reduction by the  firms increases social welfare if and only if the magnitude is at least twice the difference between the current marginal cost and its critical value. The paper also extends the results to non-linear demand, but the characterizations become less tractable.