Comparing the performance of a cournot oligopoly under different forms of regulation

Abstract

Tllis study compares the welfare implications of institutingdifferent forms of regulation on the operation of a Cournot oligopoly.The forms of regulation considered are regulation by theparticipation of a public firm producing alongside private firmsin the oligopoly (Sertel [1986]), and regulation by a pretendbut-perform mechanism (Koray and Sertel [1986, 1987]). The comparisonsare carried out in both an ex ante sense, before the industryis opened up and any setup costs are incurred, and in anex post sense, once a totally private industry is already presentwith setup costs all sunk. The possibility of free entry in theindustry is also considered for the ex ante case. In ex postcomparisons with set up costs all sunk, there turns out to becases where each method performs (welfare-wise) better than theother, and there is economic rationale for both of these forms ofregulation in comparison to one another, all depending on the relationbetween the number of firms in the oligopoly, the extentof the efficiency superiority of the private over the public firmand the size of the setup costs. Ex ante comparisons reveal thatregulation by a pretend-but-perform mechanism is superior to regulationby participation if there is free entry in the industry,and the welfare performance of regulation by a pretend-butperformmechanism cannot be replicated by regulation by participationat any size of the private sector.