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Should One Sell Domestic Firms to Foreign Ones? A Tale of Delegation, Acquisition and Collusion

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  • D. Dragone

Abstract

In a model of repeated Cournot competition under complete information, I show how the existence of a fringe of managerial firms affects the stability of a cartel of strict profit-maximizing firms. There always exists a critical dimension of the fringe that makes the cartel unstable, and this dimension is non-monotone in the total number of firms. By appropriately selecting the dimension of the fringe, a policy maker can affect the equilibrium outcome. As an example, I consider the case of a domestic authority that is contemplating whether to allow entry of a fringe of managerial foreign firms in the domestic market to increase the competitive pressure, thereby enhancing domestic welfare.

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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number 623.

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Date of creation: Jan 2008
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Handle: RePEc:bol:bodewp:623

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  1. Green, Edward J & Porter, Robert H, 1984. "Noncooperative Collusion under Imperfect Price Information," Econometrica, Econometric Society, Econometric Society, vol. 52(1), pages 87-100, January.
  2. Katz, Michael L., 1991. "Game-Playing Agents: Unobservable Contracts as Precommitments," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt79b870w0, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  3. Claude d'Aspremont & Alexis Jacquemin & Jean Jaskold Gabszewicz & John A. Weymark, 1983. "On the Stability of Collusive Price Leadership," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 16(1), pages 17-25, February.
  4. Donsimoni, Marie-Paule, 1985. "Stable heterogeneous cartels," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 3(4), pages 451-467, December.
  5. Chaim Fershtman & Kenneth L Judd, 1984. "Equilibrium Incentives in Oligopoly," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 642, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Chaim Fershtman & Kenneth L. Judd & Ehud Kalai, 1990. "Observable Contracts: Strategic Delegation and Cooperation," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 879, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Tom Ross, 1990. "Cartel Stability And Product Differentiation," Carleton Industrial Organization Research Unit (CIORU), Carleton University, Department of Economics 90-04, Carleton University, Department of Economics.
  8. Friedman, James W, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 38(113), pages 1-12, January.
  9. Rothschild, R., 1999. "Cartel stability when costs are heterogeneous," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 17(5), pages 717-734, July.
  10. Lambertini, Luca & Trombetta, Marco, 2002. "Delegation and firms' ability to collude," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 47(4), pages 359-373, April.
  11. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 95(380a), pages 138-47, Supplemen.
  12. Basu, Kaushik, 1995. "Stackelberg equilibrium in oligopoly: An explanation based on managerial incentives," Economics Letters, Elsevier, Elsevier, vol. 49(4), pages 459-464, October.
  13. Deneckere, R., 1983. "Duopoly supergames with product differentiation," Economics Letters, Elsevier, Elsevier, vol. 11(1-2), pages 37-42.
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