Empirical framework for Cournot oligopoly with private information

Abstract

We propose an empirical framework for asymmetric Cournot oligopoly with private information about variable costs. First, considering a linear demand for a homogeneous 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 product differentiation, conduct parameters, nonlinear demand, or selective entry.