Can Allowing to Trade Permits Enhance Welfare in Mixed Oligopoly?

We compare the effects of tradable emission permits (TEP) and non-tradable emission permits (NTEP) in a mixed oligopoly, where public firms and private firms compete in a product market. If all technologies and initial endowments of emission permits are symmetric among public and private firms and if the emission constraint is exogenous and binding, social welfare is greater (resp. smaller) under TEP than under NTEP when the weight of social welfare in each public firm's objective function and the degree of convexity of the production cost function and that of the abatement cost function are small (resp. large).     

Tradeable Emission Permits Regulations in the Presence of Imperfectly Competitive Product Markets: Welfare Implications

In the present paper, we analyse the interaction of a competitive market for emission permits with an oligopolistic product market. It is well known that a competitive permits market achieves the cost minimizing distribution of abatement effort among the polluting firms for a given reduction in emissions. However, when the product market is oligopolistic, it may redistribute production inefficiently among firms. It has been suggested that this inefficiency can outweigh the gains obtained from using emission permits instead of command and control. Although this argument is clearly correct under full information, it is shown in the present paper that it reverses under incomplete information. In particular, it is shown that when tradeable emission permits are specified according to the standard textbook example, they yield higher social welfare than the command and control regulation.     

Cross-Industry Emission Permits Trading

The present paper examines the effectiveness of emission permits trading across industries. We find that, while permits trading in a competitive environment minimizes costs of compliance, it also enhances product market imperfections. We also find that a standard-setting regulation yields superior welfare results if policy makers have able information. Standard setting allows policy makers the flexibility of taking into account the existing imperfections in each industry. Although not surprising, this result has important policy implications in situations in which policy makers consider establishing permits trading between publicly owned dominant polluters and other industrial polluters. Since policy makers have able information on publicly-owned firms, it might be welfare improving to directly control emissions of the dominant publicly-owned polluters. Given that many of the major polluters in the real world are large firms in heavily concentrated industries many of which are also regulated, our result warrants policy makers' attention.     

INTERNATIONALIZATION STRATEGIES IN OLIGOPOLY WITH HETEROGENEOUS FIRMS

This paper examines the foreign direct investment (FDI) versus exports decision of foreign oligopolistic firms under cost heterogeneity. An additional motivation for firms to invest abroad is the technological sourcing via spillovers, which flow from the host more efficient firm to foreign less advantaged firms. For intermediate values of the set‐up costs associated with FDI entry, it is shown that foreign firms choose opposite entry strategies. An equilibrium where the less efficient foreign firm exports whereas the more efficient invests is more likely to happen when foreign firms become more heterogeneous, the larger the trade costs and not too big oligopolistic profitability. Interestingly, the opposite may also be an equilibrium thus finding that the more efficient firm does not choose to invest, a result that emphasizes the relevance of the strategic setting under consideration. The latter result identifies a market failure since welfare in the host market is higher when both firms undertake FDI; a finding that calls attention to how appropriate are host government policies towards internationalization strategies.     

政府产品创新补贴下的企业R＆D策略选择

为了研究在政府产品创新补贴政策下企业的R＆D策略选择问题,建立了双寡头市场中面向工艺R＆D的三阶段博弈模型：第一阶段政府以社会福利最大为目标选择产品创新补贴率;第二阶段企业进行R＆D投资以降低生产成本;第三阶段企业在产品市场中进行古诺竞争。根据双寡头在第二和第三阶段是否合作,给出了研发竞争、研发卡特尔、技术共享联盟和研究共同体等四种R＆D策略,得到了相应的政府最优R＆D补贴率。研究表明：从企业的R＆D投入和产品产量的角度看,当溢出效应较高时,研发竞争策略优于研发卡特尔策略;当溢出效应较低时,研发卡特尔策略优于研发竞争策略。研发卡特尔策略与研发竞争策略相比,研发卡特尔更能推动企业利润的提高并且可以改善社会总福利。从产品产量、企业利润和社会总福利最大化角度考虑,研究共同体为四种策略中的最优策略。     

Product market competition with differentiated goods and social welfare in the presence of an industry-wide union

Mainstream locus communis indicates that a more competitive product market leads to higher social welfare levels. Using a Conjectural Variation (CV) model, this research note analyzes the effects on welfare of different degrees of product market competition in a duopoly with differentiated goods. Bargaining between the firms and the industry-wide union occurs under the Efficient Bargaining (EB) model. The work indicates that, with close substitute goods, social welfare is maximized for the intermediate levels of market competition, whereas more independent goods lead to the standard result of a high welfare level under competitive markets.     

Environmental protection without loss of international competitiveness

We develop a two‐country Cournot oligopoly model with product differentiation across countries and production‐generated pollution. The abatement of pollution by the firms in response to emission taxes is endogenous, and the number of firms can be fixed or there may be free entry and exit of firms in both countries. We propose particular unilateral and multilateral piecemeal policy reforms of emission taxes and production subsidies such that domestic industries will not suffer any loss of international competitiveness (defined in terms of either market share or profits), emission levels will be lower, and welfare could be higher in both countries.     

Prices versus quantities: environmental regulation and imperfect competition

By exercising market power, a firm will distort the production, and therefore the emissions decisions, of all firms in the market. This paper examines how the welfare implications of strategic behavior depend on how pollution is regulated. Under an emissions tax, aggregate emissions do not affect the marginal cost of polluting. In contrast, the price of tradable permits is endogenous. I show when this feedback effect increases strategic firms’ output. Relative to a tax, tradable permits may improve welfare in a market with imperfect competition. As an application, I model strategic and competitive behavior of wholesalers in a Mid-Atlantic electricity market. Simulations suggest that exercising market power decreased emissions locally, thereby substantially reducing the regional tradable permit price. Furthermore, I find that had regulators opted to use a tax instead of permits, the deadweight loss from imperfect competition would have been even greater.     

Multi-Sector Model of Tradable Emission Permits

This paper presents a multi-sector model of tradable emission permits, which includes oligopolistic and perfectly competitive industries. The firms in oligopolistic industries are assumed to exercise market power in the tradable permit market as well as in the product market. Specifically, we examine the effects of the initial permit allocation on the equilibrium outcomes, focusing on the interaction among these product and permit markets. It is shown that raising the number of initial permits allocated to one firm in an oligopolistic industry increases the output produced by that firm. Under certain conditions, raising a “clean” (less-polluting) firm’s share of the initial permits can lead to reductions in both the product and permit prices. We discuss criteria for the socially optimal allocation of initial permits, considering the trade-off between production inefficiency and consumer benefit.     

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.     

The Welfare Effects of Environmental Taxation on a Green Market Where Consumers Emit a Pollutant

This paper examines the welfare impact of emission taxes and subsidies in a green market where consumers emit a pollutant through their usage of products produced by duopolists. For this purpose, we employ a discrete?Ccontinuous model including both consumer choice and usage of an environmentally differentiated product in a utility-consistent framework. The findings indicate that an emission tax is always welfare dominant over a subsidy on consumer purchases of the clean product because of its contribution to a reduction in environmental damage. It does this by both inducing firms to improve the environmental qualities of their products and by constraining consumer usage of these products.     

Emission Permit Trading Between Imperfectly Competitive Product Markets

The present paper analyzes the efficiency of emission permit trading between two imperfectly competitive product markets. Even if firms are price takers in permit markets, the integration of permit markets can decrease welfare because of imperfect competition in product markets. If there is asymmetric information between the regulator and firms, the integration of the permit markets could have a positive effect related to the flexibility of an integrated market; this flexibility can justify integrating the permit markets.     

Trade liberalization,forward‐looking firms,and welfare

We set up an oligopolistic model with two exporting firms selling to a third market to investigate the welfare implications of trade liberalization when the exporting firms are forward‐looking. The results show that with cost asymmetry trade liberalization encourages the exporting firms to engage in tacit collusion, which may not only be detrimental to the domestic welfare, but also to the consumer surplus of the importing country. Moreover, we find that tacit collusion is less sustainable if the government of the importing country imposes a lower (higher) tariff on the more (less) efficient exporting firm. If a nonforward‐looking or a forward‐looking cost‐efficient domestic firm exists in the importing country, then trade liberalization also encourages tacit collusion.     

Environmental Tax in a Green Market

We examine the impact of an emission tax in a green market characterized by consumers’ environmental awareness and competition between firms for both environmental quality and product prices. The unique aspect of this model comes from the assumption that the cost for an increase in quality is fixed. We show that the emission tax improves welfare, thanks to a decline in pollution and despite an accentuation of product differentiation. The higher the marginal environmental damage is, the higher the optimal tax will be. The optimal tax, however, becomes lower than the marginal damage when the market is not too large. Finally, when marginal environmental damage is not too low, the optimal tax leads to a green product monopoly.     

Emission Taxes and Product Differentiation in the Presence of Foreign Firms

Industries characterized by differentiated products are important contributors of greenhouse gases and currently subject to market‐based policies such as emission taxes. In the context of developing countries, fears about foreign investment leaving the country are often used as an argument not to address industry emissions through emission taxes. This paper develops a Cournot model with product differentiation in the presence of abatement efforts where host and foreign firms are subject to an emission tax. The analysis indicates that abatement efforts and differences in pollution intensity coefficients across firms may play a significant role in the characterization of optimal policy. The analysis also suggests that the government may opt to encourage foreign, less pollution‐intensive firms via higher taxation. Additionally, this paper examines how an optimal emission tax may be adjusted as products become more differentiated; industry emissions may fall/rise as a result of more differentiated products. One important contribution of this paper is that it emphasizes the role of abatement efforts, product differentiation, and differences in pollution intensity coefficients across firms in the characterization of the optimal emission tax.     

Book Review

The authors present a simple diagrammatic exposition of a pollution-permit market in which both firms that generate pollution and consumers who are harmed by pollution are allowed to purchase permits at a single market price. They show that the market equilibrium is efficient if and only if the endowment of permits is equal to the efficient level of pollution. Furthermore, if consumers actually participate in the market, then the equilibrium is not efficient. Welfare can be improved by decreasing the endowment of permits and thereby pricing consumers out of the market.     

Environmental taxation and mergers in oligopoly markets with product differentiation

We analyze the effect of mergers on optimal environmental taxation in a Cournot oligopoly market with product differentiation. Our result indicates that the adjustment in emission tax crucially depends on the post-merger output distortion and pollution intensities. Specifically, we find that the optimal emission tax increases post-merger as long as pollution intensity of firms is higher and output distortion smaller post-merger than pre-merger. Furthermore, our result suggests that there is no need to revise environmental policy in markets where pollution intensity of firms does not change post-merger and (i) products are completely differentiated, or (ii) there are many firms for any degree of product differentiation.     

Herd Behaviour in Adoption of Network Technologies

In technology adoption, herd behaviour can lead to a suboptimal outcome as shown, among others, by Choi (1997). However, empirics find little support for the idea that a less efficient technology can conquer the market and lock out a more efficient one. Accordingly, we improve and generalize Choi's results, by introducing an additional source of uncertainty: the economic environment. We investigate how the economic environment can affect herding and consequently the efficiency of the technology choice. The result is a smaller adoption bias. In the limit, firms may optimally experiment with the new technology that turns out to be social welfare improving.     

Strategic manipulation of a pollution permit market and international trade

We consider a framework where firms which compete in an international product market are not all submitted to a pollution permit market. Using the Brander and Spencer’s framework (J Int Econ 18:83–100, 1985), we seek to determine the optimal strategies of both a dominant firm in the pollution permit market and the regulator in a such context. We first show that the dominant firm pursues a strategic manipulation to increase its profit. We also find that the regulator uses a sophisticated strategic policy to increase the domestic welfare by using two instruments: the initial allocation of pollution permits and the pollution cap.     

Brotherhood of competition: Foreign Direct Investment and domestic mergers

We examine the effects of mergers on Foreign Direct Investment (FDI), and on shaping national policies regarding FDI. In this work we develop a partial equilibrium model of an oligopolistic industry in which a number of domestic and foreign firms compete in the market for a homogeneous good in a host country. It is assumed that the number of foreign firms is endogenous and can be affected by the government policy in the host country. The government sets the policy (subsidies) to maximise social welfare. We allow domestic mergers. Our main results suggest that when the host country government imposes discriminatory lump-sum subsidy in favor of foreign firms, a merger of domestic firms will increase the number of FDI if the subsidy level is exogenous. With an endogenous level of subsidy, a merger of domestic firms will decrease (increase) the welfare if the domestic firms are more (less) efficient.