Effects of Cost Changes on Oligopolists' Profits

Abstract

This paper considers cost changes affecting all firms in a constant-returns-to-scale Cournot oligopoly. Cost increases may paradoxically benefit some or even all firms. Whether a firm benefits or is harmed depends only on whether its market share exceeds a threshold level, on whether industry costs increase or decrease, on the number of firms, and on the elasticity of the demand curve's slope (or equivalently, the fraction of cost changes that are passed on). Conditions where industry structure alone determines the effect of cost changes on firms' profits and conditions where cost increases necessarily harm some firms are developed. Copyright 1992 by Blackwell Publishing Ltd.

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