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Implementation of the Socially Optimal Outcome

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  • Chun‐Hsiung Liao
  • Yair Tauman

Abstract

We show that a welfare maximizing planner in a Cournot oligopoly can easily implement the socially optimal outcome by offering the firms a per unit subsidy in return for upfront fees. The planner announces a subsidy and auctions it off to a limited number of firms. It is shown that if at least one firm is excluded and not subsidized, the socially optimal outcome can be achieved while the planner runs no deficit. The planner does not impose any regulation on the firms. They accept his offer willingly and voluntarily. Yet, every firm makes zero net profit and consumers extract the entire surplus.

Suggested Citation

  • Chun‐Hsiung Liao & Yair Tauman, 2004. "Implementation of the Socially Optimal Outcome," Manchester School, University of Manchester, vol. 72(5), pages 618-625, September.
    • Handle: RePEc:bla:manchs:v:72:y:2004:i:5:p:618-625
    DOI: 10.1111/j.1467-9957.2004.00412.x
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    References listed on IDEAS

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    1. Sengupta, Abhijit & Tauman, Yair, 2011. "Inducing efficiency in oligopolistic markets with increasing returns to scale," Mathematical Social Sciences, Elsevier, vol. 62(2), pages 95-100, September.
    2. Michael L. Katz & Carl Shapiro, 1985. "On the Licensing of Innovations," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 504-520, Winter.
    3. White, Mark D., 1996. "Mixed oligopoly, privatization and subsidization," Economics Letters, Elsevier, vol. 53(2), pages 189-195, November.
    4. Lahiri, Sajal & Ono, Yoshiyasu, 1988. "Helping Minor Firms Reduces Welfare," Economic Journal, Royal Economic Society, vol. 98(393), pages 1199-1202, December.
    5. Moshe Bar Niv & Israel Zang, 1999. ""Costless" regulation of monopolies with large entry cost: A game theoretic approach," International Journal of Game Theory, Springer;Game Theory Society, vol. 28(1), pages 35-52.
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    Cited by:

    1. Saglam, Ismail, 2022. "Pretend-But-Perform Regulation of a Duopoly under Three Competition Modes," MPRA Paper 116767, University Library of Munich, Germany.

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