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Should One Sell Domestic Firms to Foreign Ones? A Tale of Delegation, Acquisition and Collusion

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  • D. Dragone

Abstract

In a model of repeated Cournot competition under complete information, I show how the existence of a fringe of managerial rms affects the stability of a cartel of strict pro t-maximizing rms. There always exists a critical dimension of the fringe that makes the cartel unstable, and this dimension is non-monotone in the total number of rms. By appropriately selecting the dimension of the fringe, a policy maker can a¤ect the equilibrium outcome. As an example, I consider the case of a domestic authority that is contemplating whether to allow entry of a fringe of managerial foreign rms in the domestic market to increase the competitive pressure, thereby enhancing domestic welfare.

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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number 623.

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Date of creation: Jan 2008
Handle: RePEc:bol:bodewp:623
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Find related papers by JEL classification:
  • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
  • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
  • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

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  1. Deneckere, R., 1983. "Duopoly supergames with product differentiation," Economics Letters, Elsevier, vol. 11(1-2), pages 37-42.
  2. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-940, December.
  3. Claude d'Aspremont & Alexis Jacquemin & Jean Jaskold Gabszewicz & John A. Weymark, 1983. "On the Stability of Collusive Price Leadership," Canadian Journal of Economics, Canadian Economics Association, vol. 16(1), pages 17-25, February.
  4. Marc Escrihuela, 2002. "Cartel Sustainability And Cartel Stability," Working Papers. Serie AD 2002-16, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  5. James W. Friedman, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Oxford University Press, vol. 38(1), pages 1-12.
  6. Green, Edward J & Porter, Robert H, 1984. "Noncooperative Collusion under Imperfect Price Information," Econometrica, Econometric Society, vol. 52(1), pages 87-100, January.
  7. Fershtman, Chaim & Judd, Kenneth L & Kalai, Ehud, 1991. "Observable Contracts: Strategic Delegation and Cooperation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 551-559, August.
  8. Ross, Thomas W., 1992. "Cartel stability and product differentiation," International Journal of Industrial Organization, Elsevier, vol. 10(1), pages 1-13, March.
  9. Donsimoni, Marie-Paule, 1985. "Stable heterogeneous cartels," International Journal of Industrial Organization, Elsevier, vol. 3(4), pages 451-467, December.
  10. Michael L. Katz, 1991. "Game-Playing Agents: Unobservable Contracts as Precommitments," RAND Journal of Economics, The RAND Corporation, vol. 22(3), pages 307-328, Autumn.
  11. Lambertini, Luca & Trombetta, Marco, 2002. "Delegation and firms' ability to collude," Journal of Economic Behavior & Organization, Elsevier, vol. 47(4), pages 359-373, April.
  12. Basu, Kaushik, 1995. "Stackelberg equilibrium in oligopoly: An explanation based on managerial incentives," Economics Letters, Elsevier, vol. 49(4), pages 459-464, October.
  13. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-147, Supplemen.
  14. Rothschild, R., 1999. "Cartel stability when costs are heterogeneous," International Journal of Industrial Organization, Elsevier, vol. 17(5), pages 717-734, July.
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