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Mixed Oligopoly Equilibria When Firms' Objectives Are Endogenous

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  • De Donder, Philippe
  • Roemer, John E

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 C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5900.

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Date of creation: Oct 2006
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Handle: RePEc:cpr:ceprdp:5900

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Keywords: factions; mixed oligopoly; party-unanimity Nash equilibrium; vertical differentiation;

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References

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  1. 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.
  2. John E. Roemer, 1999. "The Democratic Political Economy of Progressive Income Taxation," Econometrica, Econometric Society, Econometric Society, vol. 67(1), pages 1-20, January.
  3. White, Mark D., 2002. "Political manipulation of a public firm's objective function," Journal of Economic Behavior & Organization, Elsevier, vol. 49(4), pages 487-499, December.
  4. Matsumura, Toshihiro, 1998. "Partial privatization in mixed duopoly," Journal of Public Economics, Elsevier, vol. 70(3), pages 473-483, December.
  5. Woojin Lee & John Roemer & Karine van der Straeten, 2005. "Racism, xenophobia, and redistribution," UMASS Amherst Economics Working Papers, University of Massachusetts Amherst, Department of Economics 2005-15, .
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Cited by:
  1. Pu-yan Nie, 2014. "Effects of capacity constraints on mixed duopoly," Journal of Economics, Springer, Springer, vol. 112(3), pages 283-294, July.
  2. 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.
  3. Stefan Lutz & Mario Pezzino, 2010. "Mixed oligopoly, vertical product differentiation and fixed quality-dependent costs," ICER Working Papers, ICER - International Centre for Economic Research 08-2010, ICER - International Centre for Economic Research.
  4. Nicola Doni & Giorgio Ricchiuti, 2011. "Market Equilibrium in the Presence of Green Consumers and Responsible Firms: a Comparative Statics Analysis," Working Papers - Economics wp2011_07.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.

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