Cost Manipulation Games in Oligopoly, with Costs of Manipulating

This paper analyzes a class of two-stage Cournot games where rival firms, in the first stage, incur real resource costs in jointly manipulating their marginal costs of production, so as to influence the outcome of game they want to play in the second stage. Marginal costs may be manipulated by various means, such as redistribution of productive assets, or choice of location, or by creating an internal market for inputs. A general formulation of the game is provided, and several applications of the model are analyzed. We show that often the optimal allocation of resources within a Cournot oligopoly can be asymmetric, even when firms are ex ante symmetric, and we characterize the degree of asymmetry by finding a global solution to a convex (or concave) program. Our formulation of cost manipulation games with cost of manipulating is general enough to apply to Bertrand games with differentiated products, games involving location and transport costs (the Hotelling and Salop models), and Stackelberg games.
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