Impact of risk aversion and countervailing tax in oligopoly

Abstract

The literature recognizes the qualitative effects of risk aversion on oligopolistic market performance, but less is known about their magnitudes. We quantitatively evaluate these effects in Cournot and Bertrand oligopolies where firms maximize mean-variance utilities under linear demand and costs. The impacts are very similar for the two types of oligopoly, but have opposite signs. The impacts of a firm’s risk aversion on outputs, prices, consumer surplus and social welfare can be expressed via potentially observable variables. Since these impacts resemble the effects of firms’ cost changes, a regulator can reduce or eliminate undesirable effects of risk aversion by changing firms’ costs with appropriate countervailing taxes.