Cost Manipulation Games in Oligopoly, With Costs of Manipulating

Abstract

We analyze a class of two‐stage games where rival firms incur real resource costs in manipulating their marginal costs, so as to influence the outcome of the game they want to play in stage two. Marginal costs may be manipulated by various means, such as redistribution of productive assets, choice of location, or creation of an internal input market. A general formulation of the game is provided, and several applications are analyzed. We show that the optimal allocation of resources within an oligopoly can be asymmetric, even for ex‐ante symmetric firms. This is an additional explanation of heterogeneity in oligopoly.