Premium
Cost uncertainty in an oligopoly with endogenous entry
Author(s) -
Pinto Marco,
Goerke Laszlo
Publication year - 2022
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/boer.12326
Subject(s) - oligopoly , cournot competition , economics , microeconomics , distortion (music) , welfare , marginal cost , commodity , ex ante , deadweight loss , homogeneous , bertrand competition , free entry , computer science , market economy , amplifier , computer network , physics , bandwidth (computing) , macroeconomics , thermodynamics
How does cost uncertainty affect the welfare consequences of an oligopoly? To answer this question, we investigate a Cournot oligopoly in which firms produce a homogeneous commodity and market entry is feasible. Marginal costs are unknown ex ante, that is, prior to entering the market. They become public knowledge before output choices are made. We show that uncertainty induces additional entry in market equilibrium and also raises the socially optimal number of firms. Since the first change dominates, the excessive entry distortion is aggravated. This prediction is robust to various extensions of the analytical setup. Furthermore, the welfare loss due to oligopoly tends to increase with uncertainty.