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Private information, strategic behavior, and efficiency in Cournot markets

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When is the modeler introducing more error when analyzing a Cournot market with private cost information, whenignoring market power or when ignoring the impact of incomplete information? Is the welfare loss at the market outcome driven by private information or by market power? The answer, both to the positive and the normative questions, is that in large enough markets abstracting from market power provides amuch better approximation than abstracting from private information. Consider a free entry linear-quadratic Cournot market in which the intercept of the increasing marginal production cost of an active firm is subject to an independent shock that is private information to the firm. In the presence of a positive entry cost the free entry number of firms n is of the same order of magnitude as the size of th emarket. Then while the effect of market power decays quickly with n (it is of the order of 1/n for price and 1/n² for per capita deadweight loss), the effect of private information decays more slowly with n (it is of the order of 1/Vn for prices and 1/n for deadweight loss). Increasing n is more effective in reducing the welfare loss due tomarket power than the one due to private information. The analysis has implications for th emeasurement of Harberger's triangle and justifies a safe haven policy for the exchange of cost information among firms.

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