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Mixed Oligopoly Equilibria When Firms' Objectives Are Endogenous

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  • Philippe De Donder
  • John E. Roemer

Abstract

We 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 government’s participation. Our main results are twofold. First, government’s 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 government’s participation in the high-quality firm increases with how much consumers care for average equality.

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Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 321307000000000436.

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Date of creation: 22 Sep 2006
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Handle: RePEc:cla:levrem:321307000000000436

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  1. John E. Roemer, . "The Democratic Political Economy Of Progressive Income Taxation," Department of Economics, California Davis - Department of Economics 97-11, California Davis - Department of Economics.
  2. White, Mark D., 2002. "Political manipulation of a public firm's objective function," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 49(4), pages 487-499, December.
  3. Woojin Lee & John Roemer & Karine Van der Straeten, 2006. "Racism, Xenophobia, and Redistribution," Journal of the European Economic Association, MIT Press, MIT Press, vol. 4(2-3), pages 446-454, 04-05.
  4. Matsumura, Toshihiro, 1998. "Partial privatization in mixed duopoly," Journal of Public Economics, Elsevier, Elsevier, vol. 70(3), pages 473-483, December.
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Cited by:
  1. John Bennett & Manfredi La manna, 2012. "Mixed Oligopoly and Entry," CEDI Discussion Paper Series, Centre for Economic Development and Institutions(CEDI), Brunel University 12-01, Centre for Economic Development and Institutions(CEDI), Brunel University.
  2. Nicola Doni & Giorgio Ricchiuti, 2011. "Market Equilibrium in the Presence of Green Consumers and Responsible Firms: A Comparative Statics Analysis," Working Papers, Fondazione Eni Enrico Mattei 2011.33, Fondazione Eni Enrico Mattei.
  3. Pu-yan Nie, 2014. "Effects of capacity constraints on mixed duopoly," Journal of Economics, Springer, Springer, vol. 112(3), pages 283-294, July.

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