Optimal pollution control in a mixed oligopoly with research spillovers

We study optimal pollution abatement under a mixed oligopoly when firms engage in emissions‐reducing research and development (R&D) with imperfect appropriation. The regulator uses a tax to curb emissions. Results show that in a mixed oligopoly, the public firm has positive emissions reduction in equilibrium; however, emissions reductions of the private firm could be positive or zero. Under certain conditions, the optimal pollution tax is positive; otherwise, the tax reverts to a subsidy. Comparing mixed and private duopolies, privatisation leads to reductions in R&D and output, but to an increase in overall emissions, so privatisation tends to make the environment worse.     

Cross-border mergers in a mixed oligopoly

This paper identifies the unique strategic issues of cross-border mergers in a mixed oligopoly showing that the presence of a welfare maximizing public firm increases the incentive for such mergers. The well-known merger paradox that two-firm mergers are rarely profitable is substantially relaxed in the cases of both linear and convex production costs. The ability to identify profitable two-firm mergers in this context takes on added importance as the recent cross-border merger wave often involved industries with public firms.     

The merger paradox in a mixed oligopoly

This paper examines the set of surplus maximizing mergers in a model of mixed oligopoly. The presence of a welfare maximizing public firm reduces the set of mergers for which two private firms can profitably merge. When a public firm and private firm merge, the changes in welfare and profit depend on the resulting extent of private ownership in the newly merged firm. When the government sets that share to maximize post merger welfare as assumed in the privatization literature, the merger paradox will often remain and the merger will not take place. Yet, we show there always exists scope for mergers that increase profit and increase (if not maximize) welfare. Interestingly, these mergers often include complete privatization.     

Strategic incentive in mixed oligopoly

This paper develops a two stage game model with two competing firms in a mixed oligopolistic market, a public firm and a private firm, and only the public firm giving its manager an incentive contract. The paper presents three types of public firm owner’s objective function and each objective function corresponds to three types of delegation, either of a profit-revenue type, or of a relative performance, or, finally, of a market share one. In an equilibrium, the public firm owner has a dominant strategy to reward his manager with an incentive contract combining own profits and competitor’s profits. Different from Manasakis et al. (2007), this paper suggests that the dominant strategy of the public firm owner is to reward his manager with a profit-revenue type of contract or a market-share type of contract, that is to say profit-revenue is identical with market-share. Using relative-performance type of contract will move the manager away from the owner’s true objective function when the public firm owner only pursues maximizing the social welfare. The private firm will be crowded out and the public firm is the only producer of the market. Under profits-revenues type of contract, the owner’s objective of maximizing the summation of the profit and consumer surplus leads the manager more aggressive. Different combinations give us different results. By comparing the results, each type of incentive contract is an owner’s best response to his decision.     

Merger profitability in mixed oligopoly

We analyse merger profitability in a mixed-oligopoy Cournot model. The “merger paradox” is qualified by showing that there are profitable gains for the firms participating in a horizontal merger that is not a merger to a monopoly. In particular, it is shown that merger sustainability depends on both, the privatization degree of the mixed firm and the number of non-merging firms.      

Optimal marketing behavior in oligopoly

In this paper we first generalize the Dorfman-Steiner theorem to the case of an oligopoly with multiple competitive reactions and expansible industry demand. We then review the literature through a series of corollaries. On the basis of the theorem developed, we attempt to shed light on a oligopolistic market over a period characterized by the raise of a leader.     

Endogenous timing in a mixed oligopoly under demand uncertainty

This paper analyzes a Hotelling-type game in a mixed oligopoly, where firms can either enter the market in period 1, facing demand uncertainty, or postpone their entry, in order to acquire complete information. It is shown that, for a high (low) level of uncertainty, there is a pure (mixed)-strategy equilibrium. Moreover, the standard result in the literature—that uncertainty is a differentiation force, is only possible when the degree of uncertainty is small. An increase in the degree of uncertainty could force firms to delay their entry and lead to a socially optimal outcome.     

Endogenous timing in a mixed oligopoly with semipublic firms

An endogenous order of moves is analyzed in a mixed market where a firm jointly owned by the public sector and private domestic shareholders (a semipublic firm) competes with n private firms. We show that there is an equilibrium in which firms take production decisions simultaneously. This result is strikingly different from that obtained by Pal (Econ Lett 61:181–185, 1998), who shows that when a public firm competes with n private firms all firms producing simultaneously in the same period cannot be sustained as a Subgame Perfect Nash Equilibrium outcome. Our result differs from that of Pal (Econ Lett 61:181–185, 1998) for two reasons: firstly, we consider that there is a semipublic firm rather than a public firm. Secondly, Pal (Econ Lett 61:181–185, 1998) considers that the public firm is less efficient than private firms while in our paper all firms are equally efficient.     

Privatization and efficiency: a mixed oligopoly approach

While models of mixed oligopoly have been analyzed within a rapidly growing literature, little is known about the mechanism of efficiency improvement relating to partial privatization. In this paper, we endogenize efficiency improvement in relation to the level of privatization. We show that in the short run, an improvement in efficiency associated with a state-owned firm reduces the output substitution among firms, and that the reduction in output substitution effect is proportional to the strength of the improvement in efficiency. Specifically, if the effect of efficiency improvement is sufficiently small, the magnitude of the improvement of social welfare is reduced. In the literature, the optimal policy in the long run is full nationalization. However, we argue that the optimal policy for a state-owned firm is partial privatization. Moreover, efficiency improvement provides the impetus for indirect entry regulation of private entrants.     

Strategic delegation in consumer cooperatives under mixed oligopoly

The main aim of this paper is to study the propensity of consumer cooperatives (Coops) to use incentive schemes in situations of strategic interaction with profit-maximizing firms (PMFs). Our model provides a reason why Coops are less prone than PMFs to pay variable bonuses to their managers. We show that this occurs under price competition when in equilibrium the Coop prefers to pay a flat wage to its manager relying instead on her intrinsic motivation, whereas the profit-maximizing rival adopts a variable, high-powered incentive scheme. The main rationale is that, by recruiting a manager whose preferences are aligned with the company goals (e.g., a consumer-owner), the Coop is per se highly expansionary in term of output. Therefore, the Coop does not need to rely on an externally hired manager who sets prices aggressively to expand market share and quantity. Furthermore, adopting a monetary reward based on sales and profits leads to distorted incentives with respect to the Coop’s goal, which after all is the welfare of its members.     

Bertrand versus Cournot competition in a downstream mixed oligopoly with foreign ownership

Focusing on foreign ownership in the private firm, we examine the Cournot-Bertrand comparison in a mixed oligopolistic market with vertical market structure. We have found that if public and private firms were charged with uniform price for their inputs, then Cournot-Bertrand ranking in market outcomes confirms those obtained by Ghosh and Mitra (2010). This implies that under uniform pricing in the upstream sector, the vertical market structure does not have substantial influences on Cournot-Bertrand ranking. However, if discriminatory pricing is adopted, firm's profits, output, and social welfare are often reversed to those obtained from uniform pricing in the upstream sector. Given the closeness of products, if the share of foreign ownership is sufficiently low, social welfare in Cournot competition can exceed that of Bertrand competition, contrasting with the standard welfare ranking that Bertrand welfare is strictly higher than Cournot. This implies that Cournot competition can be more socially desirable than Bertrand in mixed oligopoly with vertical market structure if discriminatory pricing scheme is adopted by foreign upstream monopolists.     

Quantity competition vs. price competition under optimal subsidy in a mixed oligopoly

This paper reconsiders the literature on the irrelevance of privatization in mixed markets within which both quantity and price competition are investigated under product differentiation. By allowing for partially privatization of a state-controlled firm, we explore competition under different timings of firms' moves and derive the conditions under which an optimal subsidy allows to achieve maximum efficiency. We show that, irrespective of the mode of competition, while the ownership of the controlled firm is irrelevant when firms play simultaneously, it matters when firms compete sequentially, requiring the leader to be publicly-owned for an optimal subsidy to restore the first-best. The paper also focuses on the extent to which a subsidy is needed to attain the social optimum in the considered scenarios, providing an ordering which highlights the subsidy equivalence between Cournot (Bertrand) private leadership and simultaneous Bertrand (Cournot) under duopoly, and the dominance of the former in oligopoly.     

Imported inputs and privatization in downstream mixed oligopoly with foreign ownership

This paper examines welfare implications of privatization in a mixed oligopoly with vertically related markets, where an upstream foreign monopolist sells an essential input to public and private firms located downstream in the domestic country. The impact on domestic welfare of privatizing the downstream public firm is shown to contain three effects. The first is an output distortion effect, which negatively affects welfare since privatization decreases the production of final good for consumption. The second is an input price lowering effect resulting from a decrease in derived demand for the input. When the level of privatization increases, a decrease in final good production lowers input demand, causing input price to decline and domestic welfare to increase. The third is a rent‐leaking effect associated with foreign ownership in the downstream private firm. The rival domestic firm strategically increases its final good production, causing profits accrued to foreign investors to increase and domestic welfare to decline. Without foreign ownership in the downstream private firm, the optimal policy toward the public firm is complete privatization as the output distortion effect is dominated by the input price lowering effect. With foreign ownership, however, complete privatization can never be socially optimal due to the additional negative impact on domestic welfare of the rent‐leaking effect. We further discuss implications for domestic welfare under different privatization schemes (e.g., selling the privatization shares to the upstream foreign monopolist or to the rival domestic firm).     

The nexus of market concentration and privatization policy in mixed oligopoly

We analyze the nexus of privatization policy and market concentration ratio in a mixed oligopoly where one public enterprise competes against n private firms with asymmetric costs. It is shown that the nexus of privatization policy and market concentration ratio is highly sensitive to the curvature of the market demand. When the market demand is concave (convex) to the origin, a higher concentration ratio leads to a higher (smaller) degree of privatization; whereas in the case of linear demand, the privatization ratio is independent of market concentration ratio.     

Optimal versus realized policy rules in a regime-switching framework

In this paper we compare a deterministic model and a Markov switching model to analyze the behavior of the US economy and the Federal Reserve. We examine both optimal and empirical monetary policies for the US Federal Reserve between 1960 and 2008. We compare the optimal monetary policy to the actual interest rates and to the empirical reaction function. We also evaluate the sensitivity of the results to the preferences assigned to each objective. We find that there is no unique optimal solution that fits the Federal Reserve behavior over the entire period. The best fit to the actual interest rates is obtained by an optimal policy with preference switches following the rule: a high-volatility regime coincides with a priority on inflation alone while in a low-volatility regime there is equal policy priority on output stabilization and inflation.     

Agglomeration in a vertically-related oligopoly

This paper examines the location of three vertically-linked firms. In a spatial economy composed of two regions, a monopolist firm supplies an input to two consumer goods firms that compete in quantities. It is concluded that agglomeration is more likely to occur when the ratio between the transport cost of the intermediate good and the transport cost of the final good is higher. If this proportion is low, the likelihood of an agglomeration decreases with transport costs. If the ratio has an intermediate value, a non-monotonic pattern is obtained that is different from Krugman and Venables (1995).Received: October 2004, Accepted: March 2005, JEL Classification: C68, F12, F15, R12, R13This paper had the support of the Research Unit on Complexity in Economics (UECE). The author wishes to thank Masahisa Fujita, Armando Pires and an anonymous referee for helpful comments. The usual disclaimer applies.     

Stable market structures from merger activities in mixed oligopoly with asymmetric costs

This paper examines endogenous merger formations in a mixed oligopoly. Applying the core as a solution concept, we analyze which market structure(s) remain(s) stable when three firms—two symmetric private firms and one inefficient public firm—are allowed to merge with each other in a mixed Cournot industry. We show that according to the value of the marginal cost of the public firm, there always exists a pair of share ratios of the owners of both the (pre-merged) public firm and the (pre-merged) private firm such that the market structure with the merger between the public firm and one private firm belongs to the core. When the initial market structure is a mixed triopoly, it can only be blocked when one public firm and one private firm merge. Furthermore, we conduct a similar analysis in a general mixed oligopoly with one public firm and n private firms.      

Losses due to manipulation of social choice rules

In a companion paper, “Gains from Manipulating Social Choice Rules,” we analyzed the incentive to manipulate by considering the maximum number of ranks someone can gain in their preference ordering by manipulation. This paper treats the number of ranks someone else can lose due to manipulation. We find large classes of rules where that loss is very large, a few rules where the loss can be significantly smaller, and even some rules where no one ever loses—even though manipulation will take place.     

Cournot competition in a differentiated oligopoly

This paper studies product-quantity equilibria in an oligopoly. Products are interpreted as “qualities” and each firm chooses a quality-quantity pair, simultaneously. It is well known that a pure-strategy equilibrium in product-price pairs does not exist in this model, but a pure-strategy equilibrium in product-quantity pairs exists. Furthermore, in an example widely studied in the literature, the equilibrium has nice asymptotic properties.