Privatisation and vertical integration under a mixed duopoly

This paper analyses the privatisation of public firms when private firms may be vertically integrated with their suppliers. We consider a mixed duopoly with a vertically integrated public firm. The private firm bargains the price of the input with its supplier if they are not vertically integrated. We find that for a given bargaining power of the private firm, it vertically integrates with its supplier if goods are weak substitutes. We also find that there is less vertical integration in the mixed duopoly than in the private duopoly. Finally, in general, the public firm is privatised when goods are close substitutes and the bargaining power of the private firm is low enough.     

Mixed oligopoly, foreign firms, and location choice

We investigate a mixed market in which a state-owned, welfare-maximizing public firm competes against n domestic private firms and m foreign private firms which are all profit-maximizing. A circular city model with quantity-setting competition is employed. We find that the equilibrium location pattern depends on m. All private firms agglomerate in the unique equilibrium if m is zero or one. Two foreign firms induce differentiation between domestic and foreign private firms. More than two foreign firms yield differentiation among the foreign firms. Regardless of n and m, agglomeration of all domestic private firms appears in equilibrium. We provide several conditions in which eliminating the public firm from the market enhances social welfare. We extend the basic model and investigate three issues concerning multiple public firms, inefficiency of the public firm, and entries by private firms. We obtain some additional implications of welfare and equilibrium locations.     

Endogenous timing in a mixed duopoly: price competition with managerial delegation

We introduce a managerial delegation contract into the mixed duopoly model and examine its influence on price setting in a mixed duopoly in the context of the endogenous‐timing problem. We obtain the result that owners of a public and a private firm prefer to delay the setting of the prices of their products as much as possible. Thus, in equilibrium, the firms choose their prices simultaneously in the latter stage of the game. This is in contrast to the findings of the entrepreneurial case, according to which firms choose prices simultaneously in the former stage. Copyright © 2009 John Wiley & Sons, Ltd.     

PARTIAL PRIVATIZATION UNDER ASYMMETRIC MULTI‐MARKET COMPETITION

Under the assumption that a public firm provides goods or services to two markets and that a private firm provides goods or services to one market only, this study examines whether public firms should be privatized. It also investigates how the production quantity of a private firm changes when its degree of privatization increases. We find that when the market share of a duopoly market is large (small), partial privatization (nationalization) is socially preferable. We also find that the quantity produced by the private firm does not always increase along with the degree of privatization.     

Price and Quantity Contracts in a Mixed Duopoly with a Socially Concerned Firm

I study the endogenous choice of a price or quantity contract in a mixed duopoly with a socially concerned firm, which maximizes a combination of profit and consumer welfare. Equilibria with price and quantity contracts might co‐exist; welfare under price competition might be lower than under quantity competition; the firms' profit ranking might be different from that of a private duopoly or mixed duopoly with a public firm. Hence, if a firm follows a social strategy, the optimal market strategy crucially depends on the levels of social concern and competition in the market. The presence of socially concerned firms may change the mode of competition. Copyright © 2014 John Wiley & Sons, Ltd.     

Indirect taxation with shadow cost of public funds in mixed oligopoly

We adopt a mixed oligopoly model, where a state-owned welfare-maximizing public firm competes with a profit-maximizing private firm, to compare the welfare effects of the specific and ad valorem tax in the presence of the shadow cost of public funds. Following the assumption of most previous literature that total output is constant under specific and ad valorem taxation, we find that, when the shadow cost of public funds exists, the tax policy must be adjusted according to the privatization level of the public firm; if the privatization level is low (medium, high), the government needs to adopt ad valorem (specific, ad valorem) tax. Moreover, the private firm will earn a higher (lower) profit under ad valorem tax than under specific tax, if the public firm is not fully privatized and the shadow cost of public funds is high (low).     

Delegation in a mixed oligopoly: the case of multiple private firms

Previous research examining mixed duopolies shows that the use of an optimal incentive contract for the public firm increases welfare and that privatization reduces welfare. We demonstrate that these results do not generalize to a mixed oligopoly with multiple private firms. We derive the optimal incentive contract for a public firm that weighs both profit and welfare and show that its use may either increase or decrease welfare depending on the number of private firms and the exact nature of costs. We also identify the conditions that determine whether or not privatizing the public firm facing an optimal incentive contract reduces welfare. Copyright © 2008 John Wiley & Sons, Ltd.     

Investment in a New Technology as a Signal of Firm Value Under Regulatory Opportunism

We examine the question of whether a regulated firm that makes a long-term investment in infrastructure can credibly signal its private information regarding the future demand for its output to the capital market. We show that necessary conditions for a separating equilibrium in which the magnitude of investment signals high future demand may include a low degree of managerial myopia, large variability of future demand, a lenient regulatory climate, and low sunk cost. Our model suggests that in estimating valuation models of regulated firms it is important to separate firms into two groups: firms for which a separating equilibrium is likely to obtain and firms for which the equilibrium is likely to be pooling. The market value of a firm in the first group is positively correlated with its level of investment, but uncorrelated with the level of actual demand, whereas for the second group the opposite holds.     

Environmental R&D and privatization in a mixed duopoly market

The study examines strategic environmental research and development (ER&D) under environmental tax in a mixed duopoly and further analyzes the impact of privatization on it. We show that the environmental tax may not necessarily promote the private (or public) firm's ER&D, and the relative ER&D performance between firms depends on the public firm's environmental attitudes and the tax rate. When the public firm cares much for environment, it can be used as an instrument to correct the private firm's underinvestment (or overinvestment) in ER&D. Moreover, privatization can (cannot) raise both firms' ER&D simultaneously if the tax rate is high (low).     

Revealing Incentives for Compatibility Provision in Vertically Differentiated Network Industries

We determine the incentives for compatibility provision of firms that produce network goods with different intrinsic qualities when firms do not have veto power over compatibility. When network effects are strong, there are multiple equilibria in pricing and consumer decisions. We show that in some equilibria, it is the high‐quality firm that invests in compatibility, whereas in others, the low‐quality firm triggers compatibility. The socially optimal compatibility degree is zero, except under very strong network effects, where one of the equilibria has all consumers buying the low‐quality good. In this case, a partial degree of compatibility is optimal.     

Price and quality competition with quality positions

In this study, we investigate price and quality decisions in a duopoly in the presence of firms’ quality positions , which are determined by the quality levels of their existing core products. Into a standard model of vertical differentiation, we incorporate a “repositioning cost” that is proportional to the quality differences between firms’ current and new products. By varying the levels of quality positions, we analyze the impact of this cost on the equilibrium outcomes. Our results show that the presence of repositioning costs restricts firms’ abilities to improve profitability and differentiate themselves vertically. As a result, a high‐positioned firm does not necessarily have a competitive advantage over a low‐positioned firm, even if the former offers a superior new product in equilibrium. In addition, if a low‐positioned firm is significantly cost‐efficient compared with its rival with regard to repositioning, then that firm can earn higher profits than those of a high‐positioned firm by strategically offering its low‐end product. These results contrast sharply with those based on the standard vertical differentiation model.     

Voluntary Assurance of Voluntary CSR Disclosure

We study a firm's decisions to engage in socially responsible activities, voluntarily report on them, and purchase external assurance of the report. In our signaling model, neither firm type nor the level of activity is observed. We show that if voluntary assurance is not too expensive, the firm that engages in more socially responsible activities purchases external assurance and thus “selects” a separating equilibrium. As a result, CSR reports can be used to infer the level of activity and this causes all firms to engage in more socially responsible activity. Further, when voluntary assurance is required to support a separating equilibrium, greater monitoring by social activists increases the chosen quality of voluntary assurance—voluntary assurance and monitoring by social activists are complements, not substitutes.     

Bribe to Cooperate

This article discusses how to sustain R&D cooperation between two firms with different technological capabilities. We show that a long‐term relationship combining with transfer can help to maintain mutual cooperation when the discount factor is not sufficiently large. Furthermore, the less capable firm is more likely to deviate because its payoff from the deviation is higher than that of the more capable one. Under certain conditions, the more capable firm can ‘bribe’ the less capable firm to cooperate, and both firms are better off. But the less capable firm receives more. Copyright © 2011 John Wiley & Sons, Ltd.     

Agents Monitoring Their Manager: A Hard‐Times Theory of Producer Cooperation

We model the producer cooperative as a firm where a single class of individuals supplies an essential input and monitors managerial behavior. We show how this contractual structure reduces the incidence of equilibrium credit rationing, even assuming a cost disadvantage relative to a firm where these roles are specialized. Our model provides an explanation for producer and worker buyouts in the face of exit by investor owners, and, more generally, for cooperative entry in low‐return economic environments not serviced by investor‐financed firms. Further, our model predicts that a cooperative firm is less prone to monitor‐manager collusion, and that it monitors excessively in high‐return environments.     

The environmental and macroeconomic effects of socially responsible investment

We analyze the effects of socially responsible investment and public abatement on environmental quality and the economy in a continuous-time dynamic growth model featuring optimizing households and firms. Environmental quality is modeled as a renewable resource. Consumers can invest in government bonds or firm equity. Since investors feel partly responsible for environmental pollution when holding firm equity, they require a premium on the return to equity. We show that socially responsible investment behavior by households partially offsets the positive effects on environmental quality of public abatement policies.     

Mechanisms for dividing labor and sharing revenue in joint ventures

Organizing the productive efforts of firms participating in a joint venture involves assigning firms to tasks according to abilities. A multidimensional incentive problem arises when abilities are private information. In any equilibrium, it is better to be a firm who is a specialist rather than a generalist. However, generalists can expect to receive a larger allocation of revenue. If at least one firm is decisive to the profitability of the joint venture (i.e., if it can make a credible cost announcement that implies the joint venture earns zero profit), then the joint venture will not be able to implement a profit maximizing or cost minimizing production plan.Received: 21 March 2002, Accepted: 26 February 2004, JEL Classification: D82, C78, L23Any views expressed in this paper are not purported to reflect those of the United States Department of Justice. This paper benefited from the helpful comments of a referee and an associated editor.     

Tax avoidance in different firm types and the role of nonfamily involvement in private family firms

This study simultaneously distinguishes between private family firms, private nonfamily firms, public family firms, and public nonfamily firms. We show that private family firms avoid taxes less than public family firms and public nonfamily firms; however, we do not find a difference between private family firms and private nonfamily firms. Therefore, building on family firm heterogeneity, our results indicate that tax avoidance in private family firms differs depending on the involvement of nonfamily owners and/or managers. We find that private family firms that are wholly owned and managed by family members indeed avoid taxes less than private nonfamily firms.     

Career Concerns and Product Market Competition

This paper studies the effect of increased competition in the product market on managerial incentives. I propose a simple model of career concerns where firms are willing to pay for managerial talent to reduce production costs, but also to subtract talented executives from competitors. This second effect is privately valuable to firms, but is socially wasteful. As a result, equilibrium pay for talent can be inefficiently high and career concerns too strong. Explicit incentive contracts do not solve the problem, but equilibrium pay is reduced if managerial skills have firm‐specific components, or if firms are heterogeneous. In this second case, managers are efficiently assigned to firms, but equilibrium pay reflects the profitability of talent outside the efficient allocation. The effect of increased competition is ambiguous in general, and depends on the profit sensitivity to cost reductions. This ambiguity is illustrated in two examples of commonly used models of imperfect competition.     

Managerial overconfidence,overinvestment, and R&D spillover

This paper examines whether a firm will select an overoptimistic manager when a cost‐reduction investment has a spillover effect. We consider a Cournot competition model where R&D investment ex ante occurs before the process of product market competition. Our analysis reveals that there exists a unique and symmetric equilibrium for firms to delegate overoptimistic managers. We show that only when the spillover effect is sufficiently high do firms benefit from delegation. Furthermore, the equilibrium confidence level and investment decision first decrease and then increase as the spillover parameter changes. As the initial production cost increases, the equilibrium performance becomes worse.     

Real Options in an Asymmetric Duopoly: Who Benefits from Your Competitive Disadvantage?

This paper analyzes the impact of investment cost asymmetry on the optimal real option exercise strategies and the value of firms in duopoly. Both firms have an opportunity to invest in a project enhancing ( ceteris paribus ) the profit flow. We show that three types of equilibrium strategies exist. Furthermore, we express the critical levels of cost asymmetry delineating the equilibrium regions as functions of basic economic variables. The presence of strategic interactions among the firms leads to counterintuitive results. First, for a certain range of the asymmetry level, a marginal increase in the investment cost of the firm with the cost disadvantage can enhance this firm's own value. Moreover, such a cost increase can reduce the value of the competitor. Finally, we discuss the welfare implications of the optimal exercise strategies and show that the presence of identical firms can result in a socially less desirable outcome than if one of the competitors has a significant cost (dis)advantage.