IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/116767.html
   My bibliography  Save this paper

Pretend-But-Perform Regulation of a Duopoly under Three Competition Modes

Author

Listed:
  • Saglam, Ismail

Abstract

This paper considers a duopoly with asymmetric costs and demand uncertainty to study the welfare effects of pretend-but-perform regulation (PPR) of Koray and Sertel (1988) under three modes of competition, involving the Cournot, conjectural variations, and supply function competitions. PPR induces a two-stage game where each firm declares in the first stage a cost report and produces in the second stage accordingly. Theoretically characterizing and numerically computing the equilibrium of this game, we show that the consumer surplus increases if PPR is applied under the Cournot competition and it decreases if PPR is applied under the other modes of competition.

Suggested Citation

  • Saglam, Ismail, 2022. "Pretend-But-Perform Regulation of a Duopoly under Three Competition Modes," MPRA Paper 116767, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:116767
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/116767/1/MPRA_paper_116767.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Iwata, Gyoichi, 1974. "Measurement of Conjectural Variations in Oligopoly," Econometrica, Econometric Society, vol. 42(5), pages 947-966, September.
    2. Stanley S. Reynolds & David Rietzke, 2018. "Price caps, oligopoly, and entry," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 66(3), pages 707-745, October.
    3. Semih Koray & Murat Sertel, 2022. "Limit theorems for recursive delegation equilibria," Review of Economic Design, Springer;Society for Economic Design, vol. 26(4), pages 679-696, December.
    4. Grossman, Sanford J, 1981. "Nash Equilibrium and the Industrial Organization of Markets with Large Fixed Costs," Econometrica, Econometric Society, vol. 49(5), pages 1149-1172, September.
    5. LiCalzi, Marco & Pavan, Alessandro, 2005. "Tilting the supply schedule to enhance competition in uniform-price auctions," European Economic Review, Elsevier, vol. 49(1), pages 227-250, January.
    6. Haldun Evrenk & E. Zenginobuz, 2010. "Regulation through a revenue contest," Journal of Economics, Springer, vol. 99(3), pages 211-237, April.
    7. Grimm Veronika & Zöttl Gregor, 2010. "Price Regulation under Demand Uncertainty," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-34, June.
    8. Yasunori Okumura, 2017. "Asymmetric equilibria under price cap regulation," Journal of Economics, Springer, vol. 121(2), pages 133-151, June.
    9. Xavier Vives, 2011. "Strategic Supply Function Competition With Private Information," Econometrica, Econometric Society, vol. 79(6), pages 1919-1966, November.
    10. Semih Koray & İsmail Sağlam, 1999. "Bayesian Regulatory Mechanisms: Corruption and Learning," International Economic Association Series, in: Murat R. Sertel (ed.), Contemporary Economic Issues, chapter 2, pages 30-48, Palgrave Macmillan.
    11. Willems, Bert & Rumiantseva, Ina & Weigt, Hannes, 2009. "Cournot versus Supply Functions: What does the data tell us?," Energy Economics, Elsevier, vol. 31(1), pages 38-47, January.
    12. Semih Koray & Ismail Saglam, 2005. "The Need for Regulating a Bayesian Regulator," Journal of Regulatory Economics, Springer, vol. 28(1), pages 5-21, July.
    13. Possajennikov, Alex, 2009. "The evolutionary stability of constant consistent conjectures," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 21-29, October.
    14. Green, Richard J & Newbery, David M, 1992. "Competition in the British Electricity Spot Market," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 929-953, October.
    15. James J. Anton & Paul J. Gertler, 2004. "Regulation, Local Monopolies and Spatial Competition," Journal of Regulatory Economics, Springer, vol. 25(2), pages 115-141, March.
    16. Wang, Gyu Ho, 2000. "Regulating an oligopoly with unknown costs," International Journal of Industrial Organization, Elsevier, vol. 18(5), pages 813-825, July.
    17. Newbery, David M. & Greve, Thomas, 2017. "The strategic robustness of oligopoly electricity market models," Energy Economics, Elsevier, vol. 68(C), pages 124-132.
    18. Ventosa, Mariano & Baillo, Alvaro & Ramos, Andres & Rivier, Michel, 2005. "Electricity market modeling trends," Energy Policy, Elsevier, vol. 33(7), pages 897-913, May.
    19. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-940, December.
    20. Laussel, Didier, 1992. "Strategic Commercial Policy Revisited: A Supply-Function Equilibrium Model," American Economic Review, American Economic Association, vol. 82(1), pages 84-99, March.
    21. Tangeras, Thomas P., 2002. "Collusion-proof yardstick competition," Journal of Public Economics, Elsevier, vol. 83(2), pages 231-254, February.
    22. Alkan, A. & Sertel, M.R., 1988. "Pretend-but-perform contracts in sharecropping," European Journal of Political Economy, Elsevier, vol. 4(3), pages 397-423.
    23. Jumpei Hamamura & Vinay Ramani, 2023. "Social performance versus relative performance evaluation, asymmetric costs, and quantity competition under managerial delegation," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(3), pages 1706-1719, April.
    24. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-1277, November.
    25. Back, Kerry & Zender, Jaime F, 1993. "Auctions of Divisible Goods: On the Rationale for the Treasury Experiment," The Review of Financial Studies, Society for Financial Studies, vol. 6(4), pages 733-764.
    26. Vogelsang, Ingo, 1988. "A Little Paradox in the Design of Regulatory Mechanisms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(3), pages 467-476, August.
    27. Chun‐Hsiung Liao & Yair Tauman, 2004. "Implementation of the Socially Optimal Outcome," Manchester School, University of Manchester, vol. 72(5), pages 618-625, September.
    28. Stefano Colombo, 2022. "Prisoner dilemma in a vertical duopoly with managerial delegation," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(5), pages 1476-1481, July.
    29. Chaim Fershtman & Kenneth L. Judd, 2006. "Equilibrium Incentives in Oligopoly: Corrigendum," American Economic Review, American Economic Association, vol. 96(4), pages 1367-1367, September.
    30. Gollop, Frank M. & Roberts, Mark J., 1979. "Firm interdependence in oligopolistic markets," Journal of Econometrics, Elsevier, vol. 10(3), pages 313-331, August.
    31. John S. Heywood & Zerong Wang & Guangliang Ye, 2022. "Strategic delegation in an international mixed oligopoly," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(6), pages 1888-1898, September.
    32. Marc Escrihuela‐Villar & Carlos Gutiérrez‐Hita & José Vicente‐Pérez, 2020. "Supply function competition in a mixed electric power market," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(4), pages 1151-1175, August.
    33. Robert Earle & Karl Schmedders & Tymon Tatur, 2007. "On Price Caps Under Uncertainty," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(1), pages 93-111.
    34. Koray, Semih & Sertel, Murat R., 1990. "Pretend-but-perform regulation and limit pricing," European Journal of Political Economy, Elsevier, vol. 6(4), pages 451-472.
    35. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-147, Supplemen.
    36. Roques, Fabien A. & Savva, Nicos, 2009. "Investment under uncertainty with price ceilings in oligopolies," Journal of Economic Dynamics and Control, Elsevier, vol. 33(2), pages 507-524, February.
    37. Steven D. Sklivas, 1987. "The Strategic Choice of Managerial Incentives," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 452-458, Autumn.
    38. Rudkevich, Aleksandr & Duckworth, Max, 1998. "Strategic bidding in a deregulated generation market: implications for electricity prices, asset valuation and regulatory response," The Electricity Journal, Elsevier, vol. 11(1), pages 73-83.
    39. Pu‐yan Nie & Hong‐xing Wen & Chan Wang, 2023. "Price cap regulation under duopoly," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(3), pages 1376-1382, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Xavier Vives, 2011. "Strategic Supply Function Competition With Private Information," Econometrica, Econometric Society, vol. 79(6), pages 1919-1966, November.
    2. Ismail Saglam, 2023. "Licensing cost‐reducing innovations under supply function competition," Bulletin of Economic Research, Wiley Blackwell, vol. 75(1), pages 180-201, January.
    3. Ihsan Celen & Ismail Saglam, 2022. "Collusion in supply functions under technology licensing," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(5), pages 1362-1378, July.
    4. Saglam, Ismail, 2022. "Monopoly Persistence under the Threat of Supply Function Competition," MPRA Paper 111829, University Library of Munich, Germany.
    5. Haldun Evrenk & E. Zenginobuz, 2010. "Regulation through a revenue contest," Journal of Economics, Springer, vol. 99(3), pages 211-237, April.
    6. Polo, Michele & Tedeschi, Piero, 2000. "Delegation games and side-contracting," Research in Economics, Elsevier, vol. 54(1), pages 101-116, March.
    7. Xu, Lili & Lee, Sang-Ho, 2024. "Consumers' environmental awareness and endogenous managerial delegation choice between sales and environmental incentives," Energy Economics, Elsevier, vol. 136(C).
    8. Michele Polo & Piero Tedeschi, "undated". "Equilibrium and Renegotiation in Delegation Games," Working Papers 116, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    9. David P. Brown & David E. M. Sappington, 2022. "Vertical integration and capacity investment in the electricity sector," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(1), pages 193-226, February.
    10. Kai-Uwe Kuhn, 1997. "Nonlinear Pricing in Vertically Related Duopolies," RAND Journal of Economics, The RAND Corporation, vol. 28(1), pages 37-62, Spring.
    11. Lili Xu & Sang‐Ho Lee, 2023. "Cournot–Bertrand comparisons under double managerial delegation contracts with sales and environmental incentives," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(6), pages 3409-3421, September.
    12. Newbery, David M. & Greve, Thomas, 2017. "The strategic robustness of oligopoly electricity market models," Energy Economics, Elsevier, vol. 68(C), pages 124-132.
    13. Claude d'Aspremont & Rodolphe Dos Santos Ferreira & Louis-André Gérard-Varet, 2007. "Competition For Market Share Or For Market Size: Oligopolistic Equilibria With Varying Competitive Toughness," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(3), pages 761-784, August.
    14. Delbono, Flavio & Lambertini, Luca, 2016. "Ranking Bertrand, Cournot and supply function equilibria in oligopoly," Energy Economics, Elsevier, vol. 60(C), pages 73-78.
    15. Cornand, Camille & Dos Santos Ferreira, Rodolphe, 2020. "Cooperation in a differentiated duopoly when information is dispersed: A beauty contest game with endogenous concern for coordination," Mathematical Social Sciences, Elsevier, vol. 106(C), pages 101-111.
    16. Edward Anderson & Pär Holmberg, 2023. "Multi-unit auctions with uncertain supply and single-unit demand," Working Papers EPRG2310, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    17. Denis Claude & Mabel Tidball, 2025. "Taking firms' margin targets seriously in a model of competition in supply functions," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 34(1), pages 174-192, February.
    18. Yasui, Yuta & Haraguchi, Junichi, 2018. "Supply function equilibria and nonprofit-maximizing objectives," Economics Letters, Elsevier, vol. 166(C), pages 50-55.
    19. Jumpei Hamamura & Vinay Ramani, 2024. "The welfare effect of release timing of relative performance evaluation under quantity competition and asymmetric costs," Scottish Journal of Political Economy, Scottish Economic Society, vol. 71(3), pages 416-438, July.
    20. Delbono, Flavio & Lambertini, Luca, 2018. "Choosing roles under supply function competition," Energy Economics, Elsevier, vol. 71(C), pages 83-88.

    More about this item

    Keywords

    Duopoly; regulation; Cournot; conjectural variations; supply function equilibrium.;
    All these keywords.

    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
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:116767. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.