Cournot Duopoly with Cost Asymmetry and Balanced Budget Specific Taxes and Subsidies

This paper extends the Cournot duopoly model by allowing the government to impose firm-dependent specific taxes or subsidies while keeping the budget balanced. It considers two possible government goals: maximizing the social surplus and maximizing the consumer surplus. It shows that, with identical firms, the best government policy is not to intervene. In the case of cost asymmetry, social surplus and consumer surplus maximization goals require opposite strategies: to maximize the social surplus, the government should tax the high-cost firm driving the economy toward monopoly and increasing productive efficiency at the expense of lower production. In the case of consumer surplus maximization, the tax should be imposed on the low-cost firm reducing the gap between the firms’ outputs. Such a strategy, however, increases productive inefficiency and reduces the social surplus.

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Publication Details

Journal
Games
Published
2024-08-19
DOI
https://doi.org/10.3390/g15040029
Citations
1
Primary Topic
Merger and Competition Analysis
Type
article
Field-Weighted Citation Impact
1.13
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article

Cournot Duopoly with Cost Asymmetry and Balanced Budget Specific Taxes and Subsidies

Olivia Kay
1 citations
Games
Merger and Competition Analysis
1.13
article

Cournot Duopoly with Cost Asymmetry and Balanced Budget Specific Taxes and Subsidies

Olivia Kay
article en
1 citations

Abstract

This paper extends the Cournot duopoly model by allowing the government to impose firm-dependent specific taxes or subsidies while keeping the budget balanced. It considers two possible government goals: maximizing the social surplus and maximizing the consumer surplus. It shows that, with identical firms, the best government policy is not to intervene. In the case of cost asymmetry, social surplus and consumer surplus maximization goals require opposite strategies: to maximize the social surplus, the government should tax the high-cost firm driving the economy toward monopoly and increasing productive efficiency at the expense of lower production. In the case of consumer surplus maximization, the tax should be imposed on the low-cost firm reducing the gap between the firms’ outputs. Such a strategy, however, increases productive inefficiency and reduces the social surplus.

GamesVol. 15(4)
Decent work and economic growth
Openalex Percentile: Top 12%
Merger and Competition Analysis
1.13
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