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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Find related papers by JEL classification: D21 - Microeconomics - - Production and Organizations - - - Firm Behavior 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
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Woojin Lee & John Roemer & Karine van der Straeten, 2005.
"Racism, xenophobia, and redistribution,"
Working Papers
2005-15, University of Massachusetts Amherst, Department of Economics.
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