We demonstrate that, in Bertrand/Cournot equilibrium, a firm with a relatively small market share may improve social welfare by raising its price. This could be because the price increase can mitigate an output-structure distortion: if there are two goods which have the same marginal cost, then, under some conditions, the good in higher demand (the efficient good) will have a higher markup rate than the other good (the inefficient good). This suggests that the output structure is distorted in favor of the inefficient good, since the higher markup rate of the efficient good should lead to a considerable increase in demand for the inefficient good.
Review of Industrial Organization – Springer Journals
Published: Oct 10, 2009
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