Mixed Oligopoly Equilibria When Firms' Objectives Are Endogenous
AbstractWe study a vertically differentiated market where two firms simultaneously choose the quality and price of the good they sell and where consumers also care for the average quality of the goods supplied. Firms are composed of two factions whose objectives differ: one is maximizing profit while the other maximizes revenues. The equilibrium concept we model, called Firm Unanimity Nash Equilibrium (FUNE), corresponds to Nash equilibria between firms when there is efficient bargaining between the two factions inside both firms. One conceptual advantage of FUNE is that oligopolistic equilibria exist in pure strategies, even though the strategy space (price, quality) is multi-dimensional. We first show that such equilibria are inefficient, with both firms underproviding quality. We then assume that the government takes a participation in one firm, which introduces a third faction, bent on welfare maximization, in that firm. We study the characteristics of equilibria as a function of the extent of governmentâs participation. Our main results are twofold. First, governmentâs participation in the firm providing the low quality good decreases efficiency while participation in the firm providing the high quality good increases efficiency. Second, the optimal degree of governmentâs participation in the high-quality firm increases with how much consumers care for average equality.
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Date of creation: 22 Sep 2006
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Other versions of this item:
- De Donder, Philippe & Roemer, John E., 2009. "Mixed oligopoly equilibria when firms' objectives are endogenous," International Journal of Industrial Organization, Elsevier, vol. 27(3), pages 414-423, May.
- De Donder, Philippe & Roemer, John E, 2006. "Mixed Oligopoly Equilibria When Firms' Objectives Are Endogenous," CEPR Discussion Papers 5900, C.E.P.R. Discussion Papers.
- Philippe De Donder & John E. Roemer, 2006. "Mised Oligopoly Equilibria When Firms' Objectives Are Endogenous," Cowles Foundation Discussion Papers 1581, Cowles Foundation for Research in Economics, Yale University.
- De Donder, Philippe & Roemer, John, 2006. "Mixed Oligopoly Equilibria when Firms' Objectives are Endogenous," IDEI Working Papers 414, Institut d'Économie Industrielle (IDEI), Toulouse.
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- D62 - Microeconomics - - Welfare Economics - - - Externalities
- H82 - Public Economics - - Miscellaneous Issues - - - Governmental Property
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-09-30 (All new papers)
- NEP-COM-2006-09-30 (Industrial Competition)
- NEP-IND-2006-09-30 (Industrial Organization)
- NEP-MIC-2006-09-30 (Microeconomics)
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