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

This paper characterizes the welfare effects of cost reductions in a Courno t 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 th an 1/(2n + 2), or equivalently, its marginal cost exceeds a critical level determined by the market. A large cost reduction by the firm increases welf are if and only if its magnitude is at least twice the difference between t he current marginal cost and its critical value. The paper also extends the results to non-linear demand, but the characterizations become less tracta ble. (C) 2001 Elsevier Science B.V. All rights reserved.