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Mised Oligopoly Equilibria When Firms' Objectives Are Endogenous

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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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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1581.

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Length: 28 pages
Date of creation: Sep 2006
Date of revision:
Publication status: Published in International Journal of Industrial Organization (May 2009), 27(3): 414-423
Handle: RePEc:cwl:cwldpp:1581

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Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA
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Web page: http://cowles.econ.yale.edu/
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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Keywords: Mixed oligopoly; Vertical differentiation; Factions; Party-unanimity; Nash equilibrium;

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References

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  1. 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.
  2. John E. Roemer, . "The Democratic Political Economy Of Progressive Income Taxation," Department of Economics 97-11, California Davis - Department of Economics.
  3. Matsumura, Toshihiro, 1998. "Partial privatization in mixed duopoly," Journal of Public Economics, Elsevier, vol. 70(3), pages 473-483, December.
  4. Woojin Lee & John Roemer & Karine van der Straeten, 2005. "Racism, xenophobia, and redistribution," UMASS Amherst Economics Working Papers 2005-15, University of Massachusetts Amherst, Department of Economics.
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Cited by:
  1. 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.
  2. Pu-yan Nie, 2014. "Effects of capacity constraints on mixed duopoly," Journal of Economics, Springer, vol. 112(3), pages 283-294, July.
  3. John Bennett & Manfredi La manna, 2012. "Mixed Oligopoly and Entry," CEDI Discussion Paper Series 12-01, Centre for Economic Development and Institutions(CEDI), Brunel University.

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