Empirical Framework for Cournot Oligopoly with Private Information

TL;DR

This paper develops an empirical framework to analyze asymmetric Cournot oligopolies with private information, enabling identification and estimation of demand and cost distributions, and assesses welfare impacts in real markets.

Contribution

It introduces a novel likelihood-based estimation method for asymmetric Cournot models with private information, including extensions to more complex market scenarios.

Findings

Successfully applied to global crude-oil market data

Quantified welfare effects of private information

Extended model to include product differentiation and nonlinear demand

Abstract

We propose an empirical framework for asymmetric Cournot oligopoly with private information about variable costs. First, considering a linear demand for a homogenous product with a random intercept, we characterize the Bayesian Cournot-Nash equilibrium. Then we establish the identification of the joint distribution of demand and firm-specific cost distributions. Following the identification steps, we propose a likelihood-based estimation method and apply it to the global market for crude-oil and quantify the welfare effect of private information. We also consider extensions of the model to include either product differentiation, conduct parameters, nonlinear demand, or selective entry.