IDEAS home Printed from https://ideas.repec.org/p/wsu/wpaper/espinola-10.html
   My bibliography  Save this paper

The Informative Role of Subsidies

Author

Listed:
  • Ana Espinola-Arredondo
  • Felix Munoz-Garcia

    (School of Economic Sciences, Washington State University)

Abstract

This paper investigates the effect of monopoly subsidies on entry deterrence. We consider a potential entrant who observes two signals: the subsidy set by the regulator and the output level produced by the incumbent firm. We show that not only an informative equilibrium can be supported, where information about the incumbent's costs is conveyed to the entrant, but also an uninformative equilibrium, where the actions of regulator and incumbent conceal the monopolist's type, thus deterring entry. While the regulator?s role can support entry-deterrence practices, we demonstrate that his presence is nonetheless welfare improving. Furthermore, we compare equilibrium welfare relative to two benchmarks: complete information environments, and standard entry-deterrence games where the regulator is absent.

Suggested Citation

  • Ana Espinola-Arredondo & Felix Munoz-Garcia, 2011. "The Informative Role of Subsidies," Working Papers 2011-10, School of Economic Sciences, Washington State University.
  • Handle: RePEc:wsu:wpaper:espinola-10
    as

    Download full text from publisher

    File URL: http://faculty.ses.wsu.edu/WorkingPapers/AnaEspinola/WP2011-10.pdf
    File Function: First version, 2011
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. David B. Ridley, 2008. "Herding versus Hotelling: Market Entry with Costly Information," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(3), pages 607-631, September.
    2. Albaek, Svend & Overgaard, Per Baltzer, 1994. "Advertising and pricing to deter or accommodate entry when demand is unknown: Comment," International Journal of Industrial Organization, Elsevier, vol. 12(1), pages 83-87, March.
    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. Ana Espínola-Arredondo & Félix Muñoz-Garcia & Jude Bayham, 2014. "The Entry-Deterring Effects of Inflexible Regulation," Canadian Journal of Economics, Canadian Economics Association, vol. 47(1), pages 298-324, February.
    2. Espínola-Arredondo, Ana & Gal-Or, Esther & Muñoz-García, Félix, 2011. "When should a firm expand its business?," International Journal of Industrial Organization, Elsevier, vol. 29(6), pages 729-745.
    3. Espínola-Arredondo, Ana & Muñoz-García, Félix, 2013. "When does environmental regulation facilitate entry-deterring practices," Journal of Environmental Economics and Management, Elsevier, vol. 65(1), pages 133-152.
    4. Ridley, David B. & Zhang, Su, 2017. "Regulation of price increases," International Journal of Industrial Organization, Elsevier, vol. 50(C), pages 186-213.
    5. Boyer, Marcel & Mahenc, Philippe & Moreaux, Michel, 2003. "Entry preventing locations under incomplete information," International Journal of Industrial Organization, Elsevier, vol. 21(6), pages 809-829, June.
    6. Bonein, Aurélie & Turolla, Stéphane, 2017. "Spatial competition with demand uncertainty: A laboratory experiment," Working Papers 266260, Institut National de la recherche Agronomique (INRA), Departement Sciences Sociales, Agriculture et Alimentation, Espace et Environnement (SAE2).
    7. Felix Munoz-Garcia & Gulnara Zaynutdinova, 2013. "Capacity Constrained Firms and Expansion Subsidies: Should Governments Avoid Generous Subsidies?," Journal of Industry, Competition and Trade, Springer, vol. 13(4), pages 563-597, December.
    8. Ana Espínola-Arredondo & Félix Muñoz-García, 2015. "Can Poorly Informed Regulators Hinder Competition?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 61(3), pages 433-461, July.
    9. Conze, Maximilian & Kramm, Michael, 2013. "The Recommendation Effect in the Hotelling Game - A New Result for an Old Model," Ruhr Economic Papers 460, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    10. Alex Barrachina & Yair Tauman & Amparo Urbano Salvador, 2014. "Entry with Two Correlated Signals," Discussion Papers in Economic Behaviour 0714, University of Valencia, ERI-CES.
    11. Mark Armstrong & Steffen Huck, 2011. "Behavioral Economics as Applied to Firms: A Primer," Antitrust Chronicle, Competition Policy International, vol. 1.
    12. Kultti Klaus, 2011. "Sellers Like Clusters," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 11(1), pages 1-28, December.
    13. repec:zbw:rwirep:0460 is not listed on IDEAS
    14. Maximilian Conze & Michael Kramm, 2013. "The Recommendation Effect in the Hotelling Game - A New Result for an Old Model," Ruhr Economic Papers 0460, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    15. Ana Espínola-Arredondo & Félix Muñoz-García, 2016. "Profit-enhancing environmental policy: uninformed regulation in an entry-deterrence model," Journal of Regulatory Economics, Springer, vol. 50(2), pages 146-163, October.
    16. Ana Espinola-Arredondo & Esther Gal-Or & Felix Munoz-Garcia, 2009. "When Should a Firm Expand Its Business? The Signaling Implications of Business Expansion," Working Papers 2008-16, School of Economic Sciences, Washington State University.
    17. Rupayan Pal & Bibhas Saha, 2008. "Union-oligopoly bargaining and entry deterrence: a reassessment of limit pricing," Journal of Economics, Springer, vol. 95(2), pages 121-147, November.
    18. Andrey Zaikin & Ana Espinola-Arredondo, 2012. "The Carrot or the Stick: Water Allocation Strategies for Uzbekistan," Working Papers 2012-2, School of Economic Sciences, Washington State University.
    19. Bonein, Aurélie & Turolla, Stéphane, 2009. "Sequential location under one-sided demand uncertainty," Research in Economics, Elsevier, vol. 63(3), pages 145-159, September.
    20. Ana Espinola-Arredondo & Felix Munoz-Garcia & Jude Bayham, 2011. "Promoting Lies through Regulation: Deterrence Impacts of Flexible versus Inflexible Policy," Working Papers 2011-3, School of Economic Sciences, Washington State University.
    21. Munoz-Garcia Felix, 2012. "A systematic procedure for finding Perfect Bayesian Equilibria in Incomplete Information Games," Journal of Industrial Organization Education, De Gruyter, vol. 6(1), pages 1-18, December.

    More about this item

    Keywords

    Entry deterrence; Signaling; Monopoly subsidies;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

    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:wsu:wpaper:espinola-10. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/ecwsuus.html .

    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: Danielle Engelhardt (email available below). General contact details of provider: https://edirc.repec.org/data/ecwsuus.html .

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.