IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Price competition between subsidized organizations

  • BOUCKAERT, Jan
  • DE BORGER, Bruno

Many firms and organizations compete for customers while at the same time receiving substantial funding from outside sources, such as government subsidies. In this paper, we study the effects of two commonly observed, alternative subsidy systems on the behavior of price-competing firms. Specifically, we compare an open-ended per-unit price subsidy with a closed-ended subsidy, allocated according to the firms’ market shares. We find that, holding the total subsidy budget constant, the open-ended subsidy results in fiercer price competition, lower prices, higher output, and lower profits than the closed-ended, market-share based alternative. Second, the open system yields higher overall welfare for relatively modest subsidies and limited substitutability between goods; the closed system performs better at relatively high subsidy levels and when goods are closer substitutes. Third, a market-share based subsidy makes collusive behavior between firms much harder. Our results, therefore, suggest a potential trade-off between short-run and long-run objectives: subsidies designed to widen participation may stimulate collusive behavior. These findings may have important policy implications for the design of subsidy systems in, among many others, education and the arts.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: https://www.uantwerpen.be/images/uantwerpen/container1244/files/TEW%20-%20Onderzoek/Working%20Papers/RPS/2010/RPS-2010-019.pdf
Our checks indicate that this address may not be valid because: 500 Can't connect to www.uantwerpen.be:443. If this is indeed the case, please notify (Joeri Nys)


Download Restriction: no

Paper provided by University of Antwerp, Faculty of Applied Economics in its series Working Papers with number 2010019.

as
in new window

Length: 31 pages
Date of creation: Aug 2010
Date of revision:
Handle: RePEc:ant:wpaper:2010019
Contact details of provider: Postal: Prinsstraat 13, B-2000 Antwerpen
Web page: https://www.uantwerp.be/en/faculties/applied-economic-sciences/
More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Collie, David R., 2000. "State aid in the European Union: The prohibition of subsidies in an integrated market," International Journal of Industrial Organization, Elsevier, vol. 18(6), pages 867-884, August.
  2. Gersbach, Hans & Requate, Till, 2004. "Emission taxes and optimal refunding schemes," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 713-725, March.
  3. Henry Hansmann, 1981. "Nonprofit Enterprise in the Performing Arts," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 341-361, Autumn.
  4. Kala Krishna & Suddhasatwa Roy & Marie C. Thursby, 2000. "Can Subsidies for MARs be Procompetitive?," NBER Working Papers 7624, National Bureau of Economic Research, Inc.
  5. Winston, G.C. & Zimmerman, D.J., 2000. "Where is Aggressive Price Competition Taking Higher Education?," Williams Project on the Economics of Higher Education DP-56, Department of Economics, Williams College.
  6. Ilya R. Segal, 1998. "Monopoly and Soft Budget Constraint," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 596-609, Autumn.
  7. Collie, David R & Roger Clarke, 2003. "Product Differentiation and the Gains from Trade under Bertrand Duopoly," Royal Economic Society Annual Conference 2003 47, Royal Economic Society.
  8. Stefan Szymanski, 2003. "The Economic Design of Sporting Contests," Journal of Economic Literature, American Economic Association, vol. 41(4), pages 1137-1187, December.
  9. Nicholas Barr, 2004. "Higher education funding," LSE Research Online Documents on Economics 288, London School of Economics and Political Science, LSE Library.
  10. Gary Fethke, 2006. "Subsidy and Tuition Policies in Public Higher Education," Economic Inquiry, Western Economic Association International, vol. 44(4), pages 644-655, October.
  11. Nicholas Barr, 2004. "Higher Education Funding," Oxford Review of Economic Policy, Oxford University Press, vol. 20(2), pages 264-283, Summer.
  12. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
  13. Vives, Xavier, 1985. "On the efficiency of Bertrand and Cournot equilibria with product differentation," Journal of Economic Theory, Elsevier, vol. 36(1), pages 166-175, June.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ant:wpaper:2010019. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joeri Nys)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.