THE EXISTENCE OF EQUILIBRIUM IN A DIFFERENTIATED DUOPOLY WITH NETWORK EXTERNALITIES*

The existence of a pure‐strategy subgame‐perfect equilibrium in qualities and prices is investigated in a duopoly model of vertical differentiation where quality improvements require a quadratic variable cost and network externalities operate. We show that there exists a parameter region where the incentive to predate at the quality stage prevents firms from reaching a pure‐strategy non‐cooperative equilibrium with prices above marginal costs. If network externalities are sufficiently large, a Bertrand equilibrium with zero profits may arise, although the amount of product differentiation is strictly positive.     

QUALITY DIFFERENTIATION,WELFARE, AND THE MODE OF COMPETITION IN A VERTICALLY DIFFERENTIATED PRODUCT MARKET: A NOTE*

We analyse the implications of quality differences in a vertically differentiated product market for social welfare by employing an endogenous quality choice model. We find that in of Bertrand and Cournot duopolies, the degree of quality differentiation at equilibrium in an unregulated market is larger or smaller, respectively, than that of the socially second‐best optimum. This implies that a reduction in quality difference, respectively, increases or decreases social welfare in the case of Bertrand or Cournot duopolies.     

QUALITY AND WELFARE IN MIXED DUOPOLY: EFFECTS OF CAPACITY REDUCTION*

Under rationing of a public service due to its lower price and higher quality, the “privatization” could be regarded as a reduction in the capacity of the public service. We develop a model of mixed duopoly in which the service is vertically differentiated, a public firm is in a Stackelberg leader position, rationing happens, and the market is not covered. In one of two possible cases, it is shown that any reduction in the capacity of a public service will lower total surplus unless the price of the public service is too low and its quality is too high.     

INTER-MARKET COMPETITION THROUGH BUNDLING IN THE PRESENCE OF COST ADVANTAGE

This paper presents a model of inter-market competition through bundling wherein each firm has a cost advantage in a different market and competes against fringe firms. Without cost saving through bundling, there is no equilibrium in which the bundled good is provided. However, with cost saving through bundling, there exist equilibria in which one firm provides bundling and the other does not. In this case, bundling can be used as a device for entry deterrence. Finally, we illustrate that bundling can reduce social welfare by discouraging the efficient entrant from entering the market.     

INTERCONNECTION AGREEMENT BETWEEN INTERNET SERVICE PROVIDERS AND THE OPTIMAL POLICY INTERVENTION: THE CASE OF COURNOT‐TYPE COMPETITION UNDER NETWORK EXTERNALITIES*

We derive the optimal subsidy policy for an interconnection agreement between two symmetric Internet service providers (ISPs) competing á la Cournot in a network service market. The interconnection quality agreed upon is lower than the socially optimal level, as suggested by Crémer et al. (2000 ). In the basic model where both ISPs compete in the domestic market, the optimal investment subsidy rate depends positively on the strength of network externalities. In the extended model where home and foreign ISPs compete in the home market, the optimal subsidy rate for the home government is higher than in the basic model.     

DOMESTIC COMPETITION POLICY AND TARIFF POLICY COMPARED*

M. Yano and F. Dei have demonstrated that, by controlling the degree of competition in a non‐tradables market (competition policy), a country can influence the terms of trade so as to increase its welfare, relative to free trade. Using their model, this study compares the extent of this effect with that of a tariff policy. It demonstrates that a competition policy can achieve a higher utility than a tariff policy if tariff rates are at levels currently tolerated in the real world. This demonstrates that domestic competition policy may play an important role as a substitute for tariff policy.     

MULTIPLIER EFFECTS OF PUBLIC SERVICES IN A TWO‐SECTOR MODEL OF MONOPOLISTIC COMPETITION

In a two‐sector model of monopolistic competition, this paper explores what impacts an expansion of government spending on public services has on national income. In the short run where entry and exit of firms are restricted, a rise in government spending on services like health care (which has only a role of substituting for market services) increases national income, but that on services like elderly care (which has not only this role but also another role of contributing to home production of services) decreases it. These results are reversed in the long run. Welfare effects of public services are also examined.     

THE DECISION TO HIRE MANAGERS IN MIXED MARKETS UNDER BERTRAND COMPETITION*

This paper analyses the decisions of firms as to whether or not to hire managers when there is a public firm competing with a private firm in the product market. It is shown that under Bertrand competition with heterogeneous goods both firms hire managers. This is in contrast with the result obtained under Cournot competition, where only the private firm hires a manager. Moreover, welfare is lower if both firms hire managers than if neither firm does. In contrast, under Cournot competition welfare is greater if both firms hire managers.     

PRIVATIZATION AND EFFICIENCY GAIN IN AN INTERNATIONAL MIXED OLIGOPOLY WITH ASYMMETRIC COSTS*

This paper examines two policy instruments, privatization of the domestic public firm and imposition of a tariff on foreign private firms in an international mixed oligopolistic model with asymmetric costs. It first demonstrates that different orders of moves of firms will imply different government decisions on optimal tariff and on privatization policy. Following Hamilton and Slutsky (1990 ), this paper then uses an extended game to discuss endogenous roles. It indicates that the efficiency gain that highlights the importance of foreign competition is crucial in determining the welfare improving privatization policy. Moreover, the endogenous equilibria are associated with different government decisions on privatization.     

Platform intermediation in a market for differentiated products

We study a two-sided market where a platform attracts firms selling differentiated products and buyers interested in those products. In the subgame perfect equilibrium of the game, the platform fully internalises the network externalities present in the market and firms and consumers all participate in the platform with probability one. The monopolist intermediary extracts all the economic rents generated in the market, except when firms and consumers can trade outside the platform, in which case consumers obtain a rent that corresponds to the utility they would get if they did trade outside the platform. The market allocation is constraint-efficient in the sense that the monopoly platform does not introduce distortions over and above those arising from the market power of the differentiated product sellers. An increase in the number of retailers increases the amount of variety in the platform but at the same time increases competition. As a result, the platform lowers the firm fees and raises the consumer charges. In contrast, an increase in the extent of product differentiation raises the value of the platform for the consumers but weakens competition. In this case, the platform raises both the charge to the consumers and the fee for the firms.     

Viscous demand

In many markets, demand adjusts slowly to changes in prices, i.e., demand is “viscous”. This viscosity gives each firm some monopoly power, since it can raise its price above that of its competitors without immediately losing all of its customers. The resulting equilibrium pricing behavior and market outcomes can differ significantly from what one would predict in the absence of demand viscosity. In particular, the model explains the importance of market share as an investment, as well as “kinked demand curves”. It also explains how apparently “competitive” pricing behavior can lead to outcomes that mimic those of collusion.     

MONOPOLISTIC COMPETITION WITH EFFICIENCY GAPS AND A HECKSCHER‐OHLIN TRADE PATTERN*

We develop a two‐factor, three‐sector model of international trade in which the monopolistically competitive firms are characterized by different fixed production costs. We show that, depending on the pattern of the international distribution of factor endowments, the trade pattern is determined not only by relative factor endowments as suggested by Heckscher and Ohlin, but also by absolute factor endowments via a mechanism of competitive selection in the monopolistically competitive sector.     

THE BENEFIT OF REDUCED COMPETITION AND THE COST OF INFORMATION RENT UNDER OUTSOURCING

We analyse the cost and benefit of outsourcing with adverse selection in a duopoly by comparing outsourcing with in‐house production in terms of the manufacturer’s expected profit. When two manufacturers faced with ex ante cost uncertainty compete in a differentiated duopoly, outsourcing brings about a benefit in terms of reduced competition, while it entails the cost of information rent. We show that the manufacturers always choose in‐house production in Cournot and Bertrand competition, when outsourcing and in‐house production follow the same ex ante cost distribution. When the manufacturers compete in Cournot fashion, the cost of information rent always exceeds the benefit of reduced competition under outsourcing. On the other hand, when they compete in Bertrand fashion, it is possible that even if the benefit of outsourcing exceeds the cost, both manufacturers cannot choose outsourcing.     

ENDOGENOUS TIMING IN A MIXED DUOPOLY: WEIGHTED WELFARE AND PRICE COMPETITION*

In this paper we analyse the endogenous order of moves in a mixed duopoly for differentiated goods. Firms choose whether to set prices sequentially or simultaneously. The private firm maximises profits while the public firm maximises the weighted sum of the consumer and producer surpluses (weighted welfare). It is shown that the result obtained in equilibrium depends crucially on the weight given to the consumer surplus in weighted welfare and on the degree to which goods are substitutes or complements. We also analyse whether the equilibria obtained maximise the sum of the consumer and producer surpluses or not. Finally we study whether the nationality of the private firm influences the results.     

R&D INCENTIVES UNDER BERTRAND COMPETITION: A DIFFERENTIAL GAME*

We investigate dynamic R&D for process innovation in an oligopoly where firms invest in cost‐reducing activities. We focus on the correlation between R&D intensity and market structure, proving that the industry R&D investment at equilibrium monotonically increases in the number of firms. This result contradicts the established wisdom acquired from static games on the same topic. We also prove that, if competition is sufficiently tough, any increase in product substitutability reduces R&D efforts.     

OPTIMAL CONTROL OF EXTERNALITIES IN THE PRESENCE OF INCOME TAXATION*

A substantial literature examines how the Pigouvian directive that marginal taxes should equal marginal external harms needs to be modified in light of the preexisting distortion due to labor income taxation. Additional literature considers distributive concerns. It is demonstrated, however, that simple first‐best rules—unmodified for labor supply distortion or distribution—are correct in the model examined. Specifically, setting all commodity taxes equal to marginal harms (and subsidies equal to marginal benefits) can generate a Pareto improvement, as can a marginal reform toward the first‐best. Qualifications and explanations for differences from previous work are also presented.     

EQUILIBRIUM SELECTION IN THE YANO MODEL OF PRICE LEADERSHIP

Abstract. A number of studies have provided a theoretical explanation for the fact that the technologically superior firm becomes a price leader in a duopoly market for a homogeneous product. While previous studies show that the state in which the technologically superior firm becomes a price leader is a Nash equilibrium (superior leader equilibrium), they do not eliminate the possibility that the state in which the technologically inferior firm becomes a price leader is also a Nash equilibrium (inferior leader equilibrium). We demonstrate that an inferior leader equilibrium can be eliminated by the iterative elimination of weakly dominated strategies.     

WELFARE IMPLICATIONS OF THE INTERACTION BETWEEN HABITS AND CONSUMPTION EXTERNALITIES*

We analyze the welfare properties of the equilibrium path of a growth model where both habits and consumption externalities affect the utility of consumers. Our analysis highlights the crucial role played by complementarities between externalities and habits in order to generate an inefficient dynamic equilibrium. In particular, we show that the competitive equilibrium is inefficient when consumption externalities and habit‐adjusted consumption are not perfect substitutes.     

SPATIAL DISCRIMINATION,PRODUCT SUBSTITUTABILITY AND WELFARE

The paper examines a quantity–location duopoly game in a spatial discrimination model in which the delivered goods are assumed to be imperfect substitutes or complements. By extending the range of the unit transportation cost analysed in the existing literature, it is shown that a dispersed equilibrium arises in which the choice of the optimal locations is affected by the degree of product substitutability. The interaction between the latter and the size of the transportation cost is also discussed in order to verify its welfare implications. In particular, it is shown that in this spatial framework imperfect substitutability may increase welfare.     

TARIFF POLICY AND WELFARE IN AN INTERNATIONAL DUOPOLY WITH CONSUMER‐FRIENDLY INITIATIVE

The purpose of this paper is to explore how strategic tariff policy and welfare are affected by the consumer‐friendly initiative of foreign exporting firms. We define a firm that is consumer‐friendly or non‐profit‐based if it considers both its own profit and consumer surplus. This paper extends Brander and Spencer by taking the consideration of consumer‐friendly firms into an international duopoly, and within such context examining the tariff policy and welfare. The consumer‐friendly initiative that leads to trade liberalization is a ‘Win‐Win‐Win’ solution in the sense that it is not only beneficial for foreign exporting firms, but also for the government and consumers of the importing country.