The Complete Welfare Effects of Cost Reductions in a Cournot Oligopoly

Abstract

This paper provides the smallest upper bound or the critical level for a Cournot firm's market share below which its cost reduction reduces welfare. It shows that a firm's cost reduction increases social welfare with nonlinear demand and nonlinear costs if and only if its market share is above the critical level, which is equal to a weighted sum of the other firms' market shares. The paper also reports similar results for technological spill-overs within any given set of firms.