Welfare Changes in the Cournot Setting With An Empirical Application to the Telecommunications Industry

This paper characterizes the welfare efficiency of the Cournot equilibrium and provides bounds for the loss in consumer surplus, producer surplus and welfare when the number of firms in the market changes. I only assume that demand is decreasing in price and costs increasing in the quantity produced as long as Cournot equilibrium exists. I show how price, demand and average cost, before and after the number of firms in the market changes, can be used to compute these bounds. I apply these bounds to the Portuguese wireline market and conclude that the welfare loss carried by Portugal Telecom’s monopoly in 2005 reduced significantly when the company was split in 2007. JEL Classification: D43, L13 ∗I would like to thank Professors Lowell Taylor, Rahul Telang, Ramayya Krishnan, John Chuang and Marvin Sirbu for comments to previous versions of this paper. I would also like to thank participants in the Heinz College Faculty Seminar Series (Carnegie Mellon University, Pittsburgh, PA, September 22, 2009), in the 2009 Informs Annual Meeting (San Diego, CA, October 14, 2009) and in the 1st Portuguese Workshop on the Economics of ICTs (Porto, Portugal, March 11, 2010), for suggestions of improvement. This work has been supported by the CMU-Portugal Program under grant number NGN56. All remaining errors are my own.