On the role of network externalities in strategic delegation contracts with an industry-wide union

This article analyses the role of network externalities in managerial delegation contracts for differentiated products when the marginal product costs (the wage) are set by an industry-wide union. The results show that, in both Bertrand and Cournot equilibria, each owner offers a profit-oriented incentive scheme to his or her managers by penalizing sales maximization, irrespective of the strength of the network externalities. In the presence of weak network externalities and low product differentiation, firms can obtain higher profits in the equilibrium under Cournot-type quantity competition compared with that under Bertrand-type price competition. Furthermore, the wage chosen by the union is higher in the Cournot than in the Bertrand equilibrium. In the Cournot equilibrium, the wage increases with the strength of the network externalities. However, in the Bertrand equilibrium, there exists a threshold level of the degree of product differentiation.     

Licensing under convex costs

We show that both the outside and inside innovators license a new product (or drastic process innovation) to all potential licensees in the presence of convex costs, which occur under decreasing returns to scale technologies. An implication of our analysis is that a monopolist producer may prefer technology licensing in a homogeneous goods industry. We also show that an inside innovator’s incentive for innovation may be higher than that of an outside innovator.     

BERTRAND Vs. COURNOT COMPETITION WITH UPSTREAM FIRM INVESTMENT

This paper compares Bertrand and Cournot competition in a vertical structure in which the upstream firm sets the input price and makes R&D investments. We show that from the downstream firms’ point of view, Cournot competition has the advantage of a more monopolistic effect, leading to the setting of a higher price, but has the disadvantage of inducing a lower incentive for the upstream firm to invest. On the other hand, Bertrand competition has the advantage of providing a greater incentive for the upstream firm to invest but has the disadvantage of a more competitive effect, leading to the setting of a lower price. Our main findings are as follows. First, R&D investment level is greater under Bertrand competition than under Cournot competition. Second, from the standpoint of the upstream firm and industry, Bertrand competition is more efficient than Cournot competition. Third, from the standpoint of the downstream firms, Bertrand competition is more efficient than Cournot when investment is sufficiently efficient and products are sufficiently differentiated.     

Licensing cost-reducing innovations under supply function competition

In this paper, we study the licensing of cost-reducing innovations in a duopoly under supply function competition. We show that the innovator prefers fixed-fee licensing to no licensing if its cost advantage is not extremely large. Moreover, if its cost advantage is not extremely small, the innovator prefers fixed-fee licensing and mixed licensing to revenue-royalty licensing. This second result arises only because of our assumption that the cost functions are quadratic. We show that if the cost functions are linear and royalty payments are per unit of output, the innovator strictly prefers royalty licensing to fixed-fee licensing. We also show that in our model, consumer surplus is remarkably higher under any type of licensing than under no licensing. However, revenue-royalty licensing is slightly superior for consumers to the other two types of licensing and only so if the cost advantage of the innovator is sufficiently large.     

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.     

Natural monopoly and differential pricing

Under uniform pricing a monopolist cannot make a positive profit in equilibrium. I analyze how differential pricing can be exploited by a natural monopolist to deter entry when entry is costless. In a two-stage game with price competition before quantity competition I show that the incumbent firm can deter entry and make a positive profit in equilibrium. The incumbent sets two different prices, the low price to deter entry and the high price to generate profit. Entry is not possible because of scale effects. If dumping is allowed for all firms no positive profits are realizable, but welfare is reduced. I show that for some parameter values the incumbent is forced to engage in a stunt (i.e., set a negative low price) to keep entrants out.     

Cartel sustainability with vertical product differentiation: Price versus quantity competition

In the context of a vertically differentiated duopoly, we analyse the influence of the degree of differentiation on cartel sustainability, under both price and quantity competition. We find that, under both Bertrand and Cournot competition, the effect of vertical product differentiation on sustainability of the collusive equilibrium is unclear. It is shown that, given a degree of differentiation, price collusion is more sustainable than quantity collusion.     

Endogenous spillovers and incentives to innovate

Summary. We present a new approach to endogenizing technological spillovers. Firms choose levels of a cost-reducing innovation from a continuum before they engage in competition for each other's R&D-employees. Successful bids for the competitor's employee then result in higher levels of cost reduction. Finally, firms enter product market competition. We apply the approach to the long-standing debate on the effects of the mode of competition on innovation incentives. We show that incentives to acquire spillovers are stronger and incentives to prevent spillovers are weaker under quantity competition than under price competition. As a result, for a wide range of parameters, price competition gives stronger innovation incentives than quantity competition. Received: February 1, 1999; revised version: November 14, 2001     

Dynamic control of a monopolist’s product and process innovation with reference quality

ABSTRACT

Our main purpose is to investigate the dynamic control problem of a monopolist’s product and process innovation under reference quality. The main features of this article are: (i) a monopolist dealing with customer behaviour in the spirit of the principle of behaviour economics determines the product price, and carries out the activities of product and process innovation; (ii) the consumers’ demand depends on price, product quality and reference quality, and adopts an additive separable demand function form. Our main results show that under the cases of the monopolist optimum and the social planner optimum, (i) there exists an unique stable, which is a saddle-point steady-state equilibrium; (ii) the change rates of the monopolist’s investments in product and process innovation are increasing with the reference quality, while the monopolist’s steady-state investments in product and process innovation are decreasing with the reference quality; (iii) as the memory parameter increases with other parameters kept constant, it is very likely that the monopolist’s investment in process innovation be greater than the investment in product innovation; and (iv) the social incentive towards both investments in product and process innovation is always larger than the private incentive characterizing the profit-seeking monopolist.     

Raising rivals' costs: The entry of an upstream monopolist into downstream markets

A regulated upstream monopolist provides an input to firms in a downstream market. If the monopolist enters the downstream market, a natural concern is that it will act so as to raise its downstream rivals' costs. An offsetting incentive is that a higher downstream price will reduce demand for the input, which reduces the monopolist's profit. Conditions under which one incentive dominates the other are derived. The monopolist may desire to lower its downstream rivals' costs rather than raise them. These findings suggest that regulatory policy towards such downstream entry should not focus exclusively on the ability to discriminate.     

Tariffs, licensing and market structure

This paper challenges the conventional wisdom that exclusive owners of an advanced technology are always better off when producing as a monopolist than when competing against another firm. Competition against a less-efficient firm weakens the power that a host country can exert on the incumbent in the form of its tariff policy. We show that this gives a motive for a monopolist to license its technology to another foreign firm. A host country gains more from increased competition if it can induce the foreign incumbent to transfer technology to the host country firm. We show that the host country can do so by tariff commitment. We also discuss the implications of bargaining under licensing and Bertrand competition in the product market. Hence, this paper qualifies and extends the recent work of Kabiraj and Marjit [Protecting consumers through protection: The role of tariff-induced technology transfer. European Economic Review 47, 113-124].     

Oligopoly with a large number of competitors: asymmetric limit result

We address how profitable innovation is in a competitive market by investigating the asymmetric oligopoly model in which 1 firm (innovator) has a cost advantage that is not drastic enough for her to become a monopolist, and by inducing asymmetric limit outcomes when the number of the other firms (laggard firms) goes to infinity. If the innovator is the Stackelberg leader, two cases can arise: (i) the innovator behaves as in the competitive market or (ii) she occupies the entire market but cannot make the price. If we consider Cournot competition, the innovator becomes the partial monopolist. An erratum to this article can be found at     

Biased managers as strategic commitment: The relative profit approach

This paper analyzes a duopolistic model wherein each firm׳s owner can hire a biased manager for strategic reasons. We focus on the situation wherein each firm׳s owner evaluates the performance of her/his manager on the basis of her/his relative profit, which is equal to the weighted sum of her/his absolute profit and the absolute profit of her/his opponent firm. We show that in both price-setting and quantity-setting competitions, the owners of the two private firms employ aggressive managers rather than absolute profit maximizing managers regardless of the degree of importance of each firm׳s relative performance. Furthermore, in both the price competition and the quantity competition, as the degree of importance of each firm׳s relative performance increases, we show that the firms׳ owners tend to hire more aggressive managers when the degree of importance of each firm׳s relative performance is sufficiently low, whereas in both the price competition and the quantity competition, the firms׳ owners tend to hire less aggressive managers otherwise. Thus, in both the price competition and the quantity competition, the type of each firm׳s manager is not monotone with respect to the degree of each firm׳s relative performance. Thus, in both the price competition and the quantity competition, we find that the change in the optimal type of manager hired by each firm is non-monotone against the change of competitiveness in the market with the increase in the degree of importance of each firm׳s relative performance.     

Strategic competition and optimal parallel import policy

Abstract In a two‐country Hotelling type duopoly model of price competition, we show that parallel import (PI) policy can act as an instrument of strategic trade policy. The home firm’s profit is higher when it cannot price discriminate internationally if and only if the foreign market is sufficiently bigger than the domestic one. The key mechanism in the model is that the home firm’s incentive to keep its domestic price close to the optimal monopoly price affects its behavior during price competition abroad. We also analyze the welfare implications of PI policies and show that our key insights extend to quantity competition.     

HORIZONTAL MERGERS: A SOLUTION OF THE INSIDERS' DILEMMA

We show that in a three‐firm infinitely repeated Cournot game, there exists a stick and carrot strategy equilibrium in which an exogenous bilateral horizontal merger is profitable and the incentive to remain out of the merger disappears. In this sub‐game perfect equilibrium, the merged entity produces the duopoly quantity and the outsider limits its production to half the duopoly quantity. Our stick and carrot strategy entails that the merged entity threatens to produce twice the triopoly quantity for two periods if the outsider does not produce half the duopoly quantity. In this equilibrium, the aggregate price remains high enough to make the merger profitable for the insiders. Also, the quantity produced by the outsider is sufficiently low to eliminate the difference between the profit of the outsider and the merging firm.     

Partial privatization in mixed duopoly with price and quality competition

We analyze price and quality competition in a mixed duopoly in which a profit-maximizing private firm competes against a state-owned public firm. We first show that the welfare-maximizing public firm provides a lower quality product than the private firm when they are equally efficient. In order to maximize social welfare, government manipulates the objective of the public firm that is given by a convex combination of profits and social welfare. It is demonstrated that an optimal incentive of the public firm is welfare maximization under the absence of quality competition, but it is neither welfare maximization nor profit maximization under the presence of quality competition. The result supports a completely mixed objective between welfare and profit maximizations or partial privatization of the public firm.      

Local content and emission taxes when the number of foreign firms is endogenous

We consider a vertical relationship where an upstream monopolist supplies input to downstream duopolistic firms. Under the assumption that downstream firms produce under a soft capacity restriction, we show that the balance between price and quantity in downstream firms’ strategy is endogenous. In this way, the monopolist’s charge for input co-determines downstream market conduct. We spell out some consequences of this, for example, that an increase of downstream capacity costs can result in increased output. We discuss other implications in relation to pass-through and incidence of cost changes.     

国际多市场寡头条件下的贸易政策和产业政策

国际多市场寡头是Bulow( 1 985)提出的多市场寡头概念在国际贸易领域的自然延伸。在本文中 ,市场之间联系的纽带是本国企业具有规模收益递减的生产技术。本文的主要结论是 ,第一 ,如果本国企业与外国企业在外国市场进行价格竞争 ,那么 ,最优干预组合包括国内生产补贴与出口税 ,它们对本国福利的作用是一致的。第二 ,如果本国企业与外国企业在外国市场进行数量竞争 ,那么 ,最优干预政策组合包括国内生产补贴与出口补贴 ,它们作用于本国福利的方向是不一致的 ,这时 ,本国政府用国内生产补贴执行反托拉斯职能 ,用出口补贴执行利润转移职能。第三 ,作为模型的一个应用 ,本文论证了出口退税政策会加剧国内市场的扭曲 ;而且它不一定能够提高本国福利。     

The Cournot-Bertrand profit differential: A reversal result in a differentiated duopoly with wage bargaining

This paper compares Cournot and Bertrand equilibria in a downstream differentiated duopoly in which the input price (wage) paid by each downstream firm is the outcome of a strategic bargain with its upstream supplier (labor union). We show that the standard result that Cournot equilibrium profits exceed those under Bertrand competition - when the differentiated duopoly game is played in imperfect substitutes - is reversible. Whether equilibrium profits are higher under Cournot or Bertrand competition is shown to depend upon the nature of the upstream agents’ preferences and on the distribution of bargaining power over the input price. We find that the standard result holds unless unions are both powerful and place considerable weight on the wage argument in their utility function.     

Competition schemes and investment in network infrastructure under uncertainty

This paper compares two specific types of competition schemes—service-based and facility-based competition—by focusing on a firm’s incentive to invest in network infrastructure. We show that when monopoly rent is large, facility-based competition means that the initial introduction of infrastructure is made earlier than under service-based competition. However, when monopoly rent and the degree of uncertainty are both small, service-based competition brings about the earlier initial introduction of infrastructure than facility-based competition. The paper includes discussion of the policy implications of these findings.