Lobbying against environmental regulation vs. lobbying for loopholes

We analyze the determinants of environmental policy when two industry lobbies can seek a laxer policy that would apply to both industries and loophole lobbying that provides benefits specific to one industry. We determine the properties of the lobbying equilibrium, including the resulting emissions level. In many cases, higher effectiveness of loophole lobbying is detrimental for industries and beneficial for environmental quality, as it exacerbates the free-rider problem in the provision of general lobbying by inducing industries to turn towards loophole lobbying.     

Coalition-proof supply function equilibria in oligopoly

In an industry where firms compete via supply functions, the set of equilibrium outcomes is large. If decreasing supply functions are ruled out, this set is reduced significantly, but remains large. Specifically, the set of prices that can be sustained by supply function equilibria is the interval between the competitive price and the Cournot price. In sharp contrast, when the number of firms is above a threshold we identify (e.g., three if demand is linear), only the Cournot outcome can be sustained by a coalition-proof supply function equilibrium.     

A continuum of commitment

We examine a generic three-stage game for two players with alternating moves, where the first player can choose the level of adjustment cost to be paid in the last period to modify the action she announced in the first period. In the resulting continuum of commitment options, convexifying the choice between first-mover and second-mover advantage in pure strategies, we characterize when an intermediate adjustment-cost level is chosen in equilibrium. We show that the wastefulness of the adjustment cost may be in the players’ best interest, improving both of their individual net payoffs over making any fraction of the adjustment cost a side-payment from the first to the second player.     

Collective vs. individual lobbying

This paper presents a menu-auction model in which firms lobby the government to make an environmental regulation less burdensome. In this lobbying game, industrial interests are opposed by an environmental interest group. We compare political outcomes under two institutional arrangements. In the first, firms must join an organization that represents the interests of the industry. In the second, firms would lobby the government individually. The two arrangements result in strikingly different equilibrium outcomes. Only a small fraction of firms join the lobby group under collective lobbying, but all firms participate in lobbying activities when there is no such group. Thus, an attempt by firms to solve the apparent collective action problem through coordination would effectively backfire. The reason is that coordination among firms would increase the leverage available to the government, to demand high political contributions. We also evaluate the desirability of the two lobbying regimes from the private perspective of individual firms, and from the perspective of society as a whole. This permits us to evaluate possible restrictions on lobbying activities.     

Standards vs. labels with imperfect competition and asymmetric information

I demonstrate that providing information about product quality is not necessarily the best way to address asymmetric information problems when markets are imperfectly competitive. In a vertical differentiation model I show that a Minimum Quality Standard, which retains asymmetric information, generates more welfare than a label, which provides full information.     

Innovation,licensing, and price vs. quantity competition

In this paper, we develop a differentiated duopoly model with endogenous cost-reducing R&D and review the argument on welfare effect of price and quantity competition in the presence of technology licensing. We show that, with licensing, the standard conclusion on duopoly (Singh and Vives, 1984) is completely reversed. Cournot competition induces lower R&D investment than Bertrand competition does. Moreover, Cournot competition leads to lower prices, lower industry profit, higher consumer surplus and higher social welfare than Bertrand competition.     

Shopping hours and price competition

This paper develops an argument why retail prices may rise in response to the deregulation of opening hours. We make this point in a model of imperfect duopolistic competition. In a deregulated market retailers view the choice of opening hours as a means to increase the degree of perceived product differentiation thus relaxing price competition. If the consumers’ preference intensity for time is sufficiently high the equilibrium configuration has asymmetric shopping hours where one retailer stays open for longer than the other. Both retailers charge higher prices than under regulation, and both are strictly better off.     

Rent‐Seeking,Market Structure,and Growth

We study the role of productive and unproductive entrepreneurship in economic growth, in a setting where firms compete in both economic and political markets. Specifically, firms compete for market share through cost‐reducing technological innovation, and they vie for influence over government transfer policy through rent‐seeking activities. We find that rent‐seeking affects growth in two ways: it allows firms to ignore economic competition, leading to less innovation, and it alters the number of firms that are supported in equilibrium. The former effect is negative, while the latter is ambiguous. We show how these effects depend on various characteristics of economic and political markets.     

Open‐shop unions and product market competition

Abstract Evidence on the effect of product market competition on unionized wages is mixed. In this paper we show theoretically that the result may reflect genuine heterogeneity in the response of union wages to product market conditions. For low levels of unionization, union bargaining power may actually be enhanced by market competition, as firms have more to lose when there is a strike. Using recent data from the UK, we explore interactions between the level of industry competition and unionization, and find supporting evidence for this hypothesis.     

Symmetric tax competition and lobbying within federations

The present paper deals with the question of whether tax harmonization and federal taxation increase welfare in a symmetric tax competition framework with heterogeneous individuals and lobbying. A model closely related to the approach of Lai (2010) is linked to externalities that are familiar from conventional public finance. The observed deviations from efficient taxation are derived from the interplay of four externalities, which can be divided into two groups: externalities occurring due to tax competition and externalities which are caused by lobbying. Whether or not the centralization of tax competences is useful depends mainly on the relative sizes of the competition-induced and lobbying-induced externalities.     

Monopolistic competition and income dispersion

We develop a model of monopolistic competition that accounts for consumers’ heterogeneity in both incomes and preferences. This model makes it possible to study the implications of income redistribution on the toughness of competition. We show how the market outcome depends on the joint distribution of consumers’ tastes and incomes and obtain a closed-form solution for a symmetric equilibrium. Competition toughness is measured by the weighted average elasticity of substitution. Income redistribution generically affects the market outcome, even when incomes are redistributed across consumers with different tastes in a way such that the overall income distribution remains the same.     

Efficiency and surplus bounds in Cournot competition

We derive bounds on the ratios of deadweight loss and consumer surplus to producer surplus under Cournot competition. To do so, we introduce a parameterization of the degree of curvature of market demand using the parallel concepts of ρ-concavity and ρ-convexity. The “more concave” is demand, the larger the share of producer surplus in overall surplus, the smaller is consumer surplus relative to producer surplus, and the lower the ratio of deadweight loss to producer surplus. Deadweight loss over total potential surplus is at first increasing with demand concavity, then eventually decreasing.     

Entry, exit, and imperfect competition in the long run

An infinite-horizon, stochastic model of entry and exit with sunk costs and imperfect competition is constructed. A subgame perfect Nash equilibrium for the general dynamic stochastic game is shown to exist as a limit of finite-horizon equilibria. This equilibrium has a relatively simple structure characterized by two numbers per finite history. Under very general conditions, it tends to exhibit excessive entry and insufficient exit relative to a social optimum.     

Managerial risk-taking incentives, product market competition and welfare

Managers’ compensation may increase with the variance of the firm's profits. This paper investigates how this affects their choice of strategic variables, and how that affects managerial compensation. The social welfare aspects of this interaction are analyzed in a duopoly setting with uncertain linear demand and linear marginal cost. Compared to a situation in which the managers’ compensation does not depend on the variance of profits, social welfare may be either higher, lower, or remain unaffected, depending on the slope of the marginal cost curve and whether the competing firms produce goods that are demand substitutes or complements.     

The possibility of mixed-strategy equilibria with constant-returns-to-scale technology under Bertrand competition

Abstract. We analyze the Nash equilibria of a standard Bertrand model. We show that in addition to the marginal-cost pricing equilibrium there is a possibility for mixed-strategy equilibria yielding positive profit levels. We characterize these equilibria and find that having unbounded revenues is the necessary and sufficient condition for their existence. Hence, we demonstrate that under realistic assumptions the only equilibrium is marginal-cost pricing.     

Softening competition through forward trading

In the history of alleged manipulations on forward markets, it has been observed that high prices resulted from a cartel's long positions. The present paper addresses this issue in a simple model of price setting duopolists. We show that forward trading results in producers buying forward their own production, so that equilibrium prices are increased compared to the case without forward trading. This result contrasts with the social desirability of forward markets emphasized by the academic literature.     

Mechanism design with collusive supervision

We analyze an adverse selection environment with third party supervision. The supervisor is partly informed of the agent's type. The supervisor and the agent collude while interacting with the principal. Contracting with the agent directly and ignoring the presence of the supervisor constitutes the no-supervision benchmark. We show that delegating to the supervisor reduces the principal's payoff compared to the no-supervision benchmark under a standard condition on the distribution of the agent's types. In contrast, if the principal contracts with both the agent and the supervisor, there exists a mechanism that improves the principal's payoff over the no-supervision payoff.     

Democracy,dictatorship, and transformation: A proposal for a constitution-guided systematic change in formerly Soviet republics

A system transformation contains complicated social dilemmas and special-interest problems. Thus it is frequently suggested that democratic decisionmaking is inappropriate for introducing a market economy in the former socialist countries. In this paper I argue that this view rests on a nirvana approach, because it neglects the dynamics of authoritarian governments. It is shown that dictatorships tend to serve even narrower special interests than democracies and are therefore usually less likely to pursue a consistent transformation policy. However, a dictatorship could, under certain cultural and social conditions, have some advantages over democracies. But those conditions are barely present in the formerly socialist countries. Moreover, a dictatorship can by its very nature not be committed and cannot even commit itself to a certain public policy. Hence, there is only one instrument to mitigate social dilemmas in transformation countries: a set of constitutional rules. Some basic properties of a constitutional approach of system transformation are introduced in the last section of the paper.     

Positioning and negotiations: The case of pharmaceutical pricing

We study a positioning game prior to negotiations where each party invests into influential activities in order to raise voter support for their preferred bargaining outcome. The case chosen for our analysis is a bilateral monopoly where a purchaser meets a pharmaceutical firm and where the two negotiate on the price of a new and innovative medicine. We identify factors that influence on the negotiated price such as treatment effects of the new and the existing drug, production costs of the new drug, the price of the existing drug, the marginal cost of public funds and patient group size. Furthermore, it is shown that the negotiated price, depending on the characteristics of a political cost function with regard to the influential activities, is influenced by the order of moves taken by the parties. Regardless of the strategic interrelationships between the two parties, likely positioning games to be played are those where one of the two negotiating parties acts as a leader while the rival acts as a follower.     

Undesirable competition

We show that the entry of private profit-maximising firms makes the consumers worse off compared to having a nationalised monopoly. Such entry increases the nationalised firm’s profit, industry profit, and social welfare, at the expense of the consumers. Our result is important for competition policy.