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Impact of risk aversion and countervailing tax in oligopoly

Author

Listed:
  • Jim Y. Jin

    (University of St Andrews)

  • Shinji Kobayashi

    (Nihon University)

Abstract

The literature recognizes the qualitative effects of risk aversion on oligopolistic market performance, but less is known about their magnitudes. We quantitatively evaluate these effects in Cournot and Bertrand oligopolies where firms maximize mean-variance utilities under linear demand and costs. The impacts are very similar for the two types of oligopoly, but have opposite signs. The impacts of a firm’s risk aversion on outputs, prices, consumer surplus and social welfare can be expressed via potentially observable variables. Since these impacts resemble the effects of firms’ cost changes, a regulator can reduce or eliminate undesirable effects of risk aversion by changing firms’ costs with appropriate countervailing taxes.

Suggested Citation

  • Jim Y. Jin & Shinji Kobayashi, 2016. "Impact of risk aversion and countervailing tax in oligopoly," Annals of Finance, Springer, vol. 12(3), pages 393-408, December.
    • Handle: RePEc:kap:annfin:v:12:y:2016:i:3:d:10.1007_s10436-016-0285-5
    DOI: 10.1007/s10436-016-0285-5
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    Cited by:

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    2. Padhi, Sidhartha S. & Mukherjee, Soumyatanu & Edwin Cheng, T.C., 2024. "Optimal investment decision for industry 4.0 under uncertainties of capability and competence building for managing supply chain risks," International Journal of Production Economics, Elsevier, vol. 267(C).
    3. Jim Jin & Shinji Kobayashi, 2023. "Monopoly profit lower than oligopoly due to risk aversion," Economics Bulletin, AccessEcon, vol. 43(2), pages 1010-1015.

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    More about this item

    Keywords

    Risk aversion; Quantity versus price competition; Welfare effect; Unit tax;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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