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Mixed Oligopoly under Demand Uncertainty

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  • Anam, Mahmudul
  • Basher, Syed A.
  • Chiang, Shin-Hwan

Abstract

In this paper we introduce product demand uncertainty in a mixed oligopoly model and reexamine the nature of sub-game perfect Nash equilibrium (SPNE) when firms decide in the first stage whether to lead or follow in the subsequent quantity-setting game. In the non-stochastic setting, Pal (1998) demonstrated that when the public firm competes with a domestic private firm, multiple equilibria exist but the efficient equilibrium outcome is for the public firm to follow. Matsumura (2003a) proved that when the public firm's rival is a foreign private firm, leadership of the public firm is both efficient as well as SPN equilibrium. Our stochastic model shows that when the leader must commit to output before the resolution of uncertainty, multiple SPNE is possible. Whether the equilibrium outcome is public or private leadership hinges upon the degree of privatization and market volatility. More importantly, Pareto-inefficient simultaneous production is a likely SPNE. Our results are driven by the fact that the resolution of uncertainty enhances the profits of the follower firm in a manner that is well known in real option theory.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 3451.

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Date of creation: 08 Jun 2007
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Handle: RePEc:pra:mprapa:3451

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Keywords: Mixed oligopoly; Partial privatization; Demand Uncertainty;

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  1. Hamilton, Jonathan H. & Slutsky, Steven M., 1990. "Endogenous timing in duopoly games: Stackelberg or cournot equilibria," Games and Economic Behavior, Elsevier, vol. 2(1), pages 29-46, March.
  2. Pal, Debashis, 1998. "Endogenous timing in a mixed oligopoly," Economics Letters, Elsevier, vol. 61(2), pages 181-185, November.
  3. Jeffry M. Netter & William L. Megginson, 2001. "From State to Market: A Survey of Empirical Studies on Privatization," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 321-389, June.
  4. Yuanzhu Lu & Sougata Poddar, 2004. "The Choice of Capacity in Mixed Duopoly under Demand Uncertainty," CEMA Working Papers 507, China Economics and Management Academy, Central University of Finance and Economics.
  5. Kyle Bagwell, 1992. "Commitment and Observability in Games," Discussion Papers 1014, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Jacques, Armel, 2004. "Endogenous timing in a mixed oligopoly: a forgotten equilibrium," Economics Letters, Elsevier, vol. 83(2), pages 147-148, May.
  7. Saloner, Garth, 1987. "Cournot duopoly with two production periods," Journal of Economic Theory, Elsevier, vol. 42(1), pages 183-187, June.
  8. Yuanzhu Lu, 2006. "Endogenous Timing in a Mixed Oligopoly with Foreign Competitors: the Linear Demand Case," Journal of Economics, Springer, vol. 88(1), pages 49-68, June.
  9. Lu, Yuanzhu, 2007. "Endogenous timing in a mixed oligopoly: Another forgotten equilibrium," Economics Letters, Elsevier, vol. 94(2), pages 226-227, February.
  10. Amir, Rabah & Grilo, Isabel, 1999. "Stackelberg versus Cournot Equilibrium," Games and Economic Behavior, Elsevier, vol. 26(1), pages 1-21, January.
  11. de Fraja, Giovanni & Delbono, Flavio, 1990. " Game Theoretic Models of Mixed Oligopoly," Journal of Economic Surveys, Wiley Blackwell, vol. 4(1), pages 1-17.
  12. Kenneth Fjell & Debashis Pal, 1996. "A Mixed Oligopoly in the Presence of Foreign Private Firms," Canadian Journal of Economics, Canadian Economics Association, vol. 29(3), pages 737-43, August.
  13. Matsumura, Toshihiro, 1998. "Partial privatization in mixed duopoly," Journal of Public Economics, Elsevier, vol. 70(3), pages 473-483, December.
  14. Winston Chang, 2005. "Optimal Trade and Privatization Policies in an International Duopoly with Cost Asymmetry," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 14(1), pages 19-42.
  15. Stennek, Johan, 1999. "The expected consumer's surplus as a welfare measure," Journal of Public Economics, Elsevier, vol. 73(2), pages 265-288, August.
  16. Toshihiro Matsumura & Osamu Kanda, 2005. "Mixed Oligopoly at Free Entry Markets," Journal of Economics, Springer, vol. 84(1), pages 27-48, 02.
  17. Midori Hirokawa & Dan Sasaki, 2001. "Endogenously Asynchronous Entries into an Uncertain Industry," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(3), pages 435-461, 09.
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Cited by:
  1. Balogh, Tamás L. & Tasnádi, Attila, 2011. "Does timing of decisions in a mixed duopoly matter?," MPRA Paper 30993, University Library of Munich, Germany.
  2. Jianhu Zhang & Changying Li, 2013. "Endogenous timing in a mixed oligopoly under demand uncertainty," Journal of Economics, Springer, vol. 108(3), pages 273-289, April.
  3. Li, Changying & Zhang, Jianhu, 2011. "Equilibrium locations in a mixed duopoly with sequential entry in real time," Economic Modelling, Elsevier, vol. 28(3), pages 1211-1218, May.

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