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A characterization for the negative welfare effects of cost reduction in Cournot oligopoly

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Jingang Zhao

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IJIO(2001)

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This paper characterizes the welfare effects of cost reduction in a Cournot model with linear costs.

    Under linear demand, a small reduction in a firm's marginal cost reduces welfare if and only if its market share is less than 1/(2n+2), or its marginal cost exceed a critical level.

    A large cost reduction by the firm increases welfare if and only if its magnitude is at least twice the difference between the current marginal cost and its critical value.

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