Impact of risk aversion and countervailing tax in oligopoly

Jim Yongtao Jin, Shinji Kobayashi

    Research output: Contribution to journalArticlepeer-review

    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.
    Original languageEnglish
    Pages (from-to)393-408
    Number of pages16
    JournalAnnals of Finance
    Volume12
    Issue number3
    Early online date16 Nov 2016
    DOIs
    Publication statusPublished - Dec 2016

    Keywords

    • Risk aversion
    • Quantity versus price competition
    • Welfare effect
    • Unit tax

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