On strategic cost increases in a duopoly

Abstract

This study determines whether duopolists can profit from imposed cost increases, even if both firms are affected equally. Implicit in any analysis of strategic behavior is the assumption that firms are sufficiently sophisticated to anticipate the new industry equilibrium. Requiring each duopolist to have consistent conjectures abouts its rival's behavior, we show that if the firms' marginal cost curves are sufficiently flat, increasing the slopes of these curves can raise profits. The steeper marginal cost curves encourage ‘regulatory coordination’, that is, the rivals move closer to the joint-profit-maximizing outcome.