We study a Cournot oligopoly with one low-cost (dominant) firm and one or more high-cost (subordinate) firms. If the equilibrium is interior, with all firms producing positive quantity, a reallocation of production relative to the equilibrium point, such that the dominant firm produces more, while the subordinate firms produce less, can increase consumers' surplus, as well as joint firm profit. We show that a price intervention (either a price floor or a fixed price) may help achieve such an improvement. The result hinges on the dominant firm having sufficiently low cost relative to the subordinate firms. for helpful comments. All errors are mine alone.Brought to you by | Simon Fraser University Authenticated Download Date | 6/3/15 1:45 AM We further show in Sections 3.3 and 3.4 that a fixed price intervention can induce a more efficient outcome. With such an intervention, all trade takes place at the set price. To understand the intuition, notice that at any fixed price, a firm can always increase production without fearing a reduction in the price. Thus, compared to the unconstrained environment, a fixed price acts as an implicit production subsidy. This subsidy effect gives all firms an incentive to increase output and, as long as the set price is not too low, leads to equilibrium excess supply. In such a situation, however, increased production by any firm leads to lower probability of sale for other firms. There is thus a substitution effect present in this environment which, as in the unconstrained case, is discriminatory, and relatively benefits the low-cost firm, causing it to produce more than the high-cost firm. The subsidy effect is itself discriminatory, with benefit to a firm decreasing in cost. The relative advantage to the low-cost firm arising from the differential nature of the substitution effect is therefore accentuated by the discriminatory aspect of the subsidy effect. So, compared to the unconstrained outcome, total production can be expanded, and also reallocated. In addition, if the degree of asymmetry between firms is sufficiently high, i.e., if the marginal cost of the low-cost firm as a fraction of the marginal cost of the high-cost firm is sufficiently low, the high cost firm will produce less than at the unconstrained equilibrium outcome. If such an effect arises, and is strong, the intervention can serve to significantly reduce output coming from the high-cost firm and increase that coming from the low-cost firm, yielding efficiency improvements.Suppose then firms are symmetric with unknown marginal costs at a stage prior to production, and suppose also that one firm always develops low marginal cost, relative to the other, at the production stage. Innovation races, for example, often have such a characteristic, with the firm discovering the better innovation developing a significant competitive and cost advantage. A price intervention at the earlier stage then can lead to an ex ante Pareto-improvement, with higher expected consumers' surplus as well as firm profit. 3 We show in Sect...