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Bailouts in a Common Market: A Strategic Approach

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  • Ela Glowicka

Abstract

Governments in the EU grant Rescue and Restructure Subsidies to bail out ailing firms. In an international asymmetric Cournot duopoly we study effects of such subsidies on market structure and welfare. We adopt a common market setting, where consumers from the two countries form one market. We show that the subsidy is positive also when it fails to prevent the exit. The reason is a strategic effect, which forces the more efficient firm to make additional costreducing effort. When the exit is prevented, allocative and productive efficiencies are lower and the only gaining player is the rescued firm. ZUSAMMENFASSUNG - (Bail-out in gemeinsamen Märkten: Ein strategischer Ansatz) Die Regierungen der EU gewähren staatliche Beihilfe zur Rettung und Umstrukturierung von Unternehmen in Schwierigkeiten. In einem internationalen asymmetrischen Cournot-Duopol werden die Wohlfahrtseffekte und die Konsequenzen solcher Beihilfe für die Marktstruktur analysiert. Grundannahme ist ein gemeinsamer Markt, auf dem Verbraucher aus zwei Ländern zusammenkommen. Es wird gezeigt, dass die optimale Beihilfe positiv ist, auch wenn der Marktaustritt einer Firma nicht verhindert werden kann. Der Grund hierfür ist ein strategischer Effekt, der die effizientere Firma zu einer zusätzlichen kostenreduzierenden Maßnahme veranlasst. Wird der Marktaustritt verhindert, sind Allokations- und Produktionseffizienzen geringer, und der einzige aufholende Teilnehmer ist die gerettete Firma.

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Bibliographic Info

Paper provided by Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG) in its series CIG Working Papers with number SP II 2005-20.

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Length: 33 pages
Date of creation: Nov 2005
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Handle: RePEc:wzb:wzebiv:spii2005-20

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Keywords: subsidies; asymmetric oligopoly; exit; European Union;

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References

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Cited by:
  1. Ela Glowicka, 2006. "Effectiveness of Bailouts in the EU," CIG Working Papers SP II 2006-05, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).

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