Cournot competition with heterogenous firms, welfare and misallocation


De Monte, Enrico ; Koebel, Bertrand


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URN: urn:nbn:de:bsz:180-madoc-696343
Document Type: Working paper
Year of publication: 2025
The title of a journal, publication series: ZEW Discussion Papers
Volume: 25-004
Place of publication: Mannheim
Publication language: English
Institution: Sonstige Einrichtungen > ZEW - Leibniz-Zentrum für Europäische Wirtschaftsforschung
MADOC publication series: Veröffentlichungen des ZEW (Leibniz-Zentrum für Europäische Wirtschaftsforschung) > ZEW Discussion Papers
Subject: 330 Economics
Classification: JEL: C33 , L11 , L60,
Keywords (English): cost function , fixed cost , marginal cost , returns to scale , technological change , misallocation , markups , nonlinear least squares , panel data
Abstract: This paper characterizes the short- and long-run Cournot equilibrium with heterogeneous firms and stochastic technological change. In our model, firms have different technologies with heterogeneous fixed and variable costs and various degrees of markups. In a framework with homogeneous firms, Mankiw and Whinston (1986) show that the long-run Cournot equilibrium may be inefficient due to too many entries. We extend their result to the case of heterogeneous firms and show that higher industrial concentration of production is welfare improving. Using administrative data for French manufacturing firms, we estimate a wide degree of unobserved heterogeneity in both fixed and variable costs, and find a negative correlation between both. Our simulation results show that markups surprisingly only induce slight inefficiencies in the allocation of output, implying that it is almost compatible with welfare maximisation. Instead, firms’ choice to employ heterogeneous and often inefficient technologies turns out to harm more substantially welfare and aggregate output.




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