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Mixed Oligopoly Equilibria When Firms' Objectives Are Endogenous

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  • Philippe De Donder
  • John E. Roemer

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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Suggested Citation

  • Philippe De Donder & John E. Roemer, 2006. "Mixed Oligopoly Equilibria When Firms' Objectives Are Endogenous," Levine's Bibliography 321307000000000436, UCLA Department of Economics.
  • Handle: RePEc:cla:levrem:321307000000000436
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    References listed on IDEAS

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    Cited by:

    1. Robert C. Seamans, 2012. "Fighting City Hall: Entry Deterrence and Technology Upgrades in Cable TV Markets," Management Science, INFORMS, vol. 58(3), pages 461-475, March.
    2. Benassi, Corrado & Castellani, Massimiliano & Mussoni, Maurizio, 2016. "Price equilibrium and willingness to pay in a vertically differentiated mixed duopoly," Journal of Economic Behavior & Organization, Elsevier, vol. 125(C), pages 86-96.
    3. Beladi, Hamid & Chakrabarti, Avik & Hollas, Daniel, 2016. "A public firm in a vertically linked price discriminating spatial duopoly," Economic Systems, Elsevier, vol. 40(1), pages 59-63.
    4. Stefan Lutz & Mario Pezzino, 2010. "Mixed oligopoly, vertical product differentiation and fixed qualitydependent costs," The School of Economics Discussion Paper Series 1015, Economics, The University of Manchester.
    5. Doni, Nicola & Ricchiuti, Giorgio, 2013. "Market equilibrium in the presence of green consumers and responsible firms: A comparative statics analysis," Resource and Energy Economics, Elsevier, vol. 35(3), pages 380-395.
    6. Nie, Pu-Yan & Yang, Yong-Cong, 2015. "Cost-reduction innovation under mixed economy," Economics Discussion Papers 2015-68, Kiel Institute for the World Economy (IfW).
    7. Yi, Yuyin & Yang, Haishen, 2017. "Wholesale pricing and evolutionary stable strategies of retailers under network externality," European Journal of Operational Research, Elsevier, vol. 259(1), pages 37-47.
    8. Pu-yan Nie, 2014. "Effects of capacity constraints on mixed duopoly," Journal of Economics, Springer, vol. 112(3), pages 283-294, July.
    9. Robert Swinney & Gérard P. Cachon & Serguei Netessine, 2011. "Capacity Investment Timing by Start-ups and Established Firms in New Markets," Management Science, INFORMS, vol. 57(4), pages 763-777, April.
    10. Yi, Yuyin & Yang, Haishen, 2017. "An evolutionary stable strategy for retailers selling complementary goods subject to indirect network externalities," Economic Modelling, Elsevier, vol. 62(C), pages 184-193.
    11. 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.
    12. Stefan Lutz & Mario Pezzino, 2014. "Vertically Differentiated Mixed Oligopoly with Quality-dependent Fixed Costs," Manchester School, University of Manchester, vol. 82(5), pages 596-619, September.
    13. Nguyen, Xuan, 2015. "On the efficiency of private and state-owned enterprises in mixed markets," Economic Modelling, Elsevier, vol. 50(C), pages 130-137.
    14. Kamijo, Yoshio & Tomaru, Yoshihiro, 2014. "The endogenous objective function of a partially privatized firm: A Nash bargaining approach," Economic Modelling, Elsevier, vol. 39(C), pages 101-109.

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H82 - Public Economics - - Miscellaneous Issues - - - Governmental Property

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