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Bailouts in a common market: a strategic approach

  • Glowicka, Ela

Governments in the EU grant Rescue and Restructure Subsidies to bail out ailing firms. In an international asymmetric Cournot duopoly we study effects of such subsidies on market structure and welfare. We adopt a common market setting, where consumers from the two countries form one market. We show that the subsidy is positive also when it fails to prevent the exit. The reason is a strategic effect, which forces the more efficient firm to make additional cost-reducing effort. When the exit is prevented, allocative and productive efficiencies are lower and the only gaining player is the rescued firm.

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Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 177.

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Date of creation: Oct 2005
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Handle: RePEc:trf:wpaper:177
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  2. d'ASPREMONT, Claude & JACQUEMIN, Alexis, . "Cooperative and noncooperative R&D in duopoly with spillovers," CORE Discussion Papers RP -823, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  14. Jingang Zhao, 1999. "A Characterization of the Negative Welfare Effects of Cost Reduction in Cournot Oligopoly," Working Papers 99-06, Ohio State University, Department of Economics.
  15. Marc Escrihuela-Villar, 2008. "Innovation And Market Concentration With Asymmetric Firms," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 17(3), pages 195-207.
  16. Aiginger, Karl & Pfaffermayr, Michael, 1997. "Looking at the Cost Side of "Monopoly."," Journal of Industrial Economics, Wiley Blackwell, vol. 45(3), pages 245-67, September.
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  18. Leahy, Dermot & Montagna, Catia, 2001. "Strategic Trade Policy with Heterogeneous Costs," Bulletin of Economic Research, Wiley Blackwell, vol. 53(3), pages 177-82, July.
  19. 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.
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