Cost Manipulation in an Asymmetric Oligopoly: The Taxation Problem

This paper analyzes the problem of altering the cost structure within an oligopoly, in the presence of costs of manipulation. Oligopolistic firms (which differ from each other in production costs) compete a la Cournot in the second stage, taking as given firm-specific taxees or input prices. In the first stage, a government, or a regulatory agency, or a monopolistic input supplier, sets firm-specific taxes, charges, or input prices, to manipulate the cost structure of its agents, in order to maximize some objective function.