Consumer discrimination,duopoly, and black firm entry: The welfare effect of subsidies |
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Authors: | Gregory N Price |
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Abstract: | Consumer discrimination, to the extent that it lowers expected profit for black owned firms, discourages the entry of new
black firms. From a social welfare perspective, consumer discrimination may be welfare reducing, since market output is lower
than otherwise. If so, a policy intervention that subsidizes new black firms may improve social welfare. This article presents
a simple model of duopoly where consumer discrimination exists with uncertainty, and the only cost of production is a “loss
of sales” cost. Given the Nash equilibrium, in which a black and white firm must select a price to charge, conditions are
derived for which a profit subsidy to a new black firm increases, decreases, or has no effect on social welfare. |
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