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Mixed Oligopoly under Demand Uncertainty

Author

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  • Anam, Mahmudul
  • Basher, Syed A.
  • Chiang, Shin-Hwan

Abstract

In this paper we introduce product demand uncertainty in a mixed oligopoly model and reexamine the nature of sub-game perfect Nash equilibrium (SPNE) when firms decide in the first stage whether to lead or follow in the subsequent quantity-setting game. In the non-stochastic setting, Pal (1998) demonstrated that when the public firm competes with a domestic private firm, multiple equilibria exist but the efficient equilibrium outcome is for the public firm to follow. Matsumura (2003a) proved that when the public firm's rival is a foreign private firm, leadership of the public firm is both efficient as well as SPN equilibrium. Our stochastic model shows that when the leader must commit to output before the resolution of uncertainty, multiple SPNE is possible. Whether the equilibrium outcome is public or private leadership hinges upon the degree of privatization and market volatility. More importantly, Pareto-inefficient simultaneous production is a likely SPNE. Our results are driven by the fact that the resolution of uncertainty enhances the profits of the follower firm in a manner that is well known in real option theory.

Suggested Citation

  • Anam, Mahmudul & Basher, Syed A. & Chiang, Shin-Hwan, 2007. "Mixed Oligopoly under Demand Uncertainty," MPRA Paper 3451, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:3451
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    References listed on IDEAS

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    1. Yuanzhu Lu & Sougata Poddar, 2006. "The Choice Of Capacity In Mixed Duopoly Under Demand Uncertainty," Manchester School, University of Manchester, vol. 74(3), pages 266-272, June.
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    5. Lu, Yuanzhu, 2007. "Endogenous timing in a mixed oligopoly: Another forgotten equilibrium," Economics Letters, Elsevier, vol. 94(2), pages 226-227, February.
    6. Yuanzhu Lu, 2006. "Endogenous Timing in a Mixed Oligopoly with Foreign Competitors: the Linear Demand Case," Journal of Economics, Springer, vol. 88(1), pages 49-68, June.
    7. Kenneth Fjell & Debashis Pal, 1996. "A Mixed Oligopoly in the Presence of Foreign Private Firms," Canadian Journal of Economics, Canadian Economics Association, vol. 29(3), pages 737-743, August.
    8. Stennek, Johan, 1999. "The expected consumer's surplus as a welfare measure," Journal of Public Economics, Elsevier, vol. 73(2), pages 265-288, August.
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    Cited by:

    1. Jianhu Zhang & Changying Li, 2013. "Endogenous timing in a mixed oligopoly under demand uncertainty," Journal of Economics, Springer, vol. 108(3), pages 273-289, April.
    2. Tamás Balogh & Attila Tasnádi, 2012. "Does timing of decisions in a mixed duopoly matter?," Journal of Economics, Springer, vol. 106(3), pages 233-249, July.
    3. Li, Changying & Zhang, Jianhu, 2011. "Equilibrium locations in a mixed duopoly with sequential entry in real time," Economic Modelling, Elsevier, vol. 28(3), pages 1211-1218, May.

    More about this item

    Keywords

    Mixed oligopoly; Partial privatization; Demand Uncertainty;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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