A note on endogenous firm efficiency in Cournot models of incomplete information

Martin models Cournot firms with informational asymmetries on costs to investigate the relation between X-inefficiency and the number of firms. He argues that an increase in the number of competitors decreases firm efficiency. We show that his results hold in a complete information model: they are due to the implicit assumption of increasing returns to scale. We further argue that a setting of adverse selection on cost and of ex post cost observability tends to isolate the intrafirm agency problem from what happens inside the product market, leaving firm efficiency unaffected by the degree of competition. (C) 1996 Academic Press, Inc.