" Cournot equilibrium and welfare with heterogeneous firms "

Abstract :
This paper characterizes the short and long-run Cournot equilibrium with heterogeneous firms and stochastic technological change. We consider that firms have different technologies with heterogeneous fixed and variable costs and various degrees of market power in the product market. In a framework with homogeneous firms, Mankiw and Whinston (1986) showed that the long-run Cournot equilibrium may be inefficient due to too many entries. We extend their result to the case of heterogeneous firms and show that higher industrial concentration of production is welfare improving. Empirically, using data for manufacturing firms in France, we found a wide degree of heterogeneity in technologies, and we are able to identify the technology parameters which reproduce the observed distribution of firms size. We characterize the type of fixed and variable cost functions which allow to generate the observed level of cost and profit. We investigate empirically whether profit maximization is compatible with welfare maximisation, and find substantial levels of inefficiency. Imperfect competition, however, contributes modestly to the inefficiency, which is mainly explained by firms’ use of heterogeneous and often inefficient technologies.