Forward trading and collusion in oligopoly

We consider an infinitely repeated oligopoly in which at each period firms not only serve the spot market by either competing in prices or quantities but also have the opportunity to trade forward contracts. Contrary to the pro-competitive results of finite-horizon models, we find that the possibility of forward trading allows firms to sustain collusive profits that otherwise would not be possible to achieve. The result holds both for price and quantity competition and follows because (collusive) contracting of future sales is more effective in deterring deviations from the collusive plan than inducing the previously identified pro-competitive effects.     

Trade and industrial structure with large firms and heterogeneity

We develop a model of trade and firm heterogeneity in an oligopolistic setting. This setting generates key differences in terms of modelling setup, modelling predictions and welfare implications with respect to the existing literature on trade and firm heterogeneity. In terms of modelling setup our approach allows us to explore interaction between potentially large heterogeneous firms, in contrast to recent trade literature with heterogeneity and atomistic firms. As a result variables like market price and total sales vary endogenously as different firms enter the market. We offer a solution for the integer problem inherent in small group models, based on stochastic dominance. The model generates testable predictions deviating from the benchmark firm heterogeneity model of Melitz (2003) in terms of the effect of trade liberalisation on markups, market shares, the market price. We also derive predictions on the effect of distance and market size on the probability of zero trade flows and export prices. Our model features the possibility that welfare declines as a result of trade liberalisation. The result in Brander and Krugman (1983), the benchmark model for trade under oligopoly, that welfare unambiguously rises with free entry and might decline without free entry due to increased cross-hauling is reversed. In a setting with heterogeneous instead of homogeneous firms, welfare might decline with free entry. A negative welfare effect without free entry can be ruled out if the firm size distribution is sufficiently dispersed.     

THE SCOPE FOR NON‐PROFIT OBJECTIVES IN A MIXED OLIGOPOLY UNDER INTERNATIONAL COMPETITION

We ask how the scope for non‐profit objectives in a state‐owned enterprise (SOE) in a mixed oligopoly changes because of competition from firms in another country. There is no change if costs and demand are given, unless the trade partner is a low‐cost country. However, the scope for non‐profit objectives is limited by the country's relative size if wages are market‐clearing and if workers and firms are stationary, because of reduced competitiveness caused by higher real wage rates. The total surplus is then not affected by the actions of the SOE. International trade does not otherwise reduce the scope for its non‐profit objectives if workers and firms are mobile, but productivity differences might require restrictions in order to avoid a complete relocation of the workforce in either country.     

Coordination in Oligopoly

The private and social efficiency of two "behavioral" coordination mechanisms is examined in this paper. In Cournot oligopoly, firms prefer immediate coordination on the Nash equilibrium (interpreted as a preplay communication) over the best-reply dynamics (and fictitous play) which converge to the equilibrium, but with delay (interpreted as a decentralized learning process). In Bertrand oligopoly, firms prefer the learning process. These results indicate that firms have incentives to create institutions, such as trade associations or informal meetings, to facilitate coordination of production capacities, but not prices. Moreover, quantity agreements may even increase social welfare.     

Globalization,product differentiation,and wage inequality

Abstract This paper develops a two‐country, general equilibrium model of oligopoly in which the degree of horizontal product differentiation is endogenously determined by firms’ strategic investments in product innovation. Consumers seek variety and product innovation is more skill intensive than production. Stronger import competition increases innovation incentives, and thereby the relative demand for skill. An intra‐industry trade expansion following trade liberalization can therefore increase wage inequality between skilled and unskilled workers. As long as some industries remain shielded from international competition, the welfare implications of globalization are found to be generally ambiguous.     

Partial Privatization,Foreign Competition,and Optimum Tariff*

Using a simple international mixed oligopoly model with one public and one or more foreign firms, this paper examines the effect of partial privatization or foreign competition on optimum tariffs and finds that foreign competition lowers the optimal tariff rate but partial privatization raises it. This result implies that trade liberalization is welfare improving if a country opens up its economy by allowing foreign competition. However, the liberalization policy is not desirable when the country only partially or completely privatizes its publicly‐owned enterprises.     

A DYNAMIC ANALYSIS OF COOPERATIVE RESEARCH IN THE SEMICONDUCTOR INDUSTRY*

In this article I construct a dynamic oligopoly model of research joint ventures (RJVs) where firms, investing to improve product quality, fully share the rewards of research success. RJVs benefit firms by eliminating duplicative research efforts, but firms also give up the possibility of becoming a solo innovator. Consumers benefit from lower prices, but may have to wait longer for new products to arrive. I show that RJVs are welfare enhancing by quantitatively evaluating these trade‐offs with data from the semiconductor industry. I also analyze how changes in product market competition affect research cooperation.     

Cross-Border Mergers as Instruments of Comparative Advantage

A two-country model of oligopoly in general equilibrium is used to show how changes in market structure accompany the process of trade and capital-market liberalization. The model predicts that bilateral mergers in which low-cost firms buy out higher-cost foreign rivals are profitable under Cournot competition. As a result, trade liberalization can trigger international merger waves, in the process encouraging countries to specialize and trade more in accordance with comparative advantage. With symmetric countries, welfare is likely to rise, though the distribution of income always shifts towards profits.     

Downstream merger with upstream market power

We examine how a downstream merger affects input prices and, in turn, the profitability of a such a merger under Cournot competition with differentiated products. Input suppliers can be interpreted as ordinary upstream firms, or trade unions organising workers. If the input suppliers are plant-specific, we find that a merger is more profitable than in a corresponding model with exogenous input prices. In contrast to the received literature, we find that it can be more profitable to take part in a merger than being an outsider. For firm-specific input suppliers, on the other hand, results are reversed. We apply our model to endogenous merger formation in an international oligopoly, and show that the equilibrium market structure is likely to be characterised by cross-border merger.     

Privatization when the public firm is as efficient as private firms

The literature on mixed oligopoly shows that when production costs are quadratic the public firm is privatized if the competition in the product market is high enough. Similarly, when the public firm is less efficient than private firms and the marginal costs of production are constant, the government privatizes the public firm if its efficiency is low enough. In this paper we analyze this issue assuming that the public firm maximizes the weighted sum of consumer surplus, private profit and the profit of the public firm. If all firms have the same marginal cost of production we obtain that for some value of parameters the government does not privatize the public firm regardless of how many private firms are competing in the product market. We also obtain that the consumer surplus can be lower in the mixed oligopoly than in the private oligopoly.     

Why Environmentalists Resist Trade Liberalization

We build a two-country differential game model of polluting oligopoly to consider the effects of trade liberalization. As in static models, the opening of trade promotes competition but expands global pollution. Characterizing open-loop and feedback strategies, we derive a sufficient condition for losses from trade. This losses-from-trade proposition could provide a rationale for persistent resistance to globalization by environmentalists.     

Information sharing about a demand shock

This paper examines two questions in asymmetric Cournot and Bertrand oligopoly with a demand shock. Under which conditions is information sharing a subgame-perfect equilibrium? What is the welfare effect when firms are better off? Given these questions, the normal assumptions in the earlier literature can be relaxed in three ways: demand functions can be asymmetric; a demand shock can affect firms differently; distributions of the demand shock and information signals can be arbitrary. Under these general assumptions, the answer to the first question is: every firm's response to the demand shock is stronger when all firms have perfect information than when one firm does so alone; the answer to the second question is: social welfare increases in Cournot competition, and consumer surplus decreases in Bertrand competition.     

出口退税是一项稳健的贸易政策吗?

出口退税作为一项被WTO允许的政策工具,为许多国家的政府所使用。本文在一个国际多市场寡头模型之中,研究出口退税的稳健性。主要结论如下:(1)如果本国政府的目标是最大化国家福利,那么,出口退税不是一项稳健的贸易政策;(2)如果本国政府关心收入分配,对于国家福利的不同组成部分赋予不同的权重,那么,如果政府过于关注本国企业利润,而不是本国消费者剩余和出口退税成本,出口退税就会成为一项稳健的贸易政策;(3)本国政府过于关注本国企业利润的一个可能原因是,本国企业可以通过政治捐献去游说政府,制定对于自己有利的政策。那么,如果相对于国家福利而言,政府过于关注政治捐献,出口退税就会成为一项稳健的贸易政策。     

SPATIAL PERFECT COMPETITION: A UNIFORM DELIVERED PRICING MODEL

Abstract.  Spatial competition is often probed in terms of spatial oligopoly and/or monopolistic competition in the literature. This paper considers spatial competition as a form of perfect competition, in the sense that the firms are assumed to be price-takers located at the centre of a market area and practising uniform pricing. It shows that under scale economy competitive equilibria can occur, and may actually be observed in the form of international price differentials. Both a very high price and a very low price can yield conditions of competitive equilibrium in spatially or otherwise separate markets.     

Permit Trading and Credit Trading: A Comparison of Cap-Based and Rate-Based Emissions Trading Under Perfect and Imperfect Competition

This paper compares emissions trading based on a cap on total emissions (permit trading) and on relative standards per unit of output (credit trading). Two types of market structure are considered: perfect competition and Cournot oligopoly. We find that output, abatement costs and the number of firms are higher under credit trading. Allowing trade between permit-trading and credit-trading sectors may increase welfare. With perfect competition, permit trading always leads to higher welfare than credit trading. With imperfect competition, credit trading may outperform permit trading. Environmental policy can lead to exit, but also to entry of firms. Entry and exit have a profound impact on the performance of the schemes, especially under imperfect competition. We find that it may be impossible to implement certain levels of total industry emissions. Under credit trading several levels of the relative standard can achieve the same total level of emissions.     

Gains from Trade in a Differential Game Model of Asymmetric Oligopoly

This paper revisits a classical topic of trade gains in a differential game model of oligopoly in which Home and Foreign firms differ in the number and cost. After deriving the feedback Nash equilibrium, we provide examples to consider how the difference in the number of firms or costs affects gainfulness of trade. We prove that feedback strategies can result in implications for trade gains which are sharply different from the open-loop case.     

Trade liberalization gains under different trade theories: a case study for Ukraine

We analyze the deep and comprehensive free trade area (DCFTA) between Ukraine and the EU using a multi-regional general-equilibrium simulation model. Three alternative trade structures are implemented: (a) a standard specification of perfect competition based on the Armington assumption of regionally differentiated goods; (b) monopolistic competition among symmetric manufacturing firms; and (c) a competitive selection model of heterogeneous manufacturing firms. Across these structures the DCFTA indicates relatively large gains for Ukraine of more than 3 percent. We show, however, that the gains for Ukraine are lower when we consider monopolistic competition in manufacturing. This is attributed to a movement of resources into Ukraine’s traditional export sectors to the EU, which produce under constant returns. While there is little danger of deindustrialization dominating the overall welfare gains, we do observe substantially lower gains when we consider monopolistic competition. To our knowledge, this is the first empirical confirmation of the theoretic predication that the relative gains from trade in monopolistic competition models might be lower than under perfect competition in the context of a numeric simulation of economic integration. Under the popular heterogeneous-firms monopolistic competition theory we find significant firm selection effects indicating welfare impacts for Ukraine that are less than under the Armington structure but above those found under symmetric firms and monopolistic competition. These results are important considerations for Ukraine’s overall development strategy.     

Market Integration,Choice of Technology,and Welfare

This paper develops an international trade model where firms in a duopoly may diversify their technologies for strategic reasons. The firms face the same set of technologies given by a tradeoff between marginal costs and fixed costs, but depending on trade costs firms may choose different technologies. Market integration may induce a technological restructuring where firms either diversify their technologies or switch to a homogeneous technology. In general, market integration improves welfare. However, a small decrease of trade costs which induces a switch from heterogeneous technologies to a homogeneous technology may locally reduce global welfare. The model also shows that productivity differences lead to intra‐industry firm heterogeneity in size and exports similar to the “new–new” trade models with monopolistic competition.     

Learning by Doing, Precommitment and Infant-Industry Promotion

We examine the implications for strategic trade policy of different assumptions about precommitment in a two-period Cournot oligopoly game with learning by doing. The inability of firms and governments to precommit to future actions encourages strategic behaviour which justifies an optimal first-period export tax relative to the profit-shifting benchmark of an export subsidy. In the linear case the optimal subsidy is increasing in the rate of learning with government precommitment but decreasing in it without, in apparent contradiction to the infant-industry argument. Extensions to active foreign policy, distortionary taxation and Bertrand competition are also considered.     

Optimal manipulation rules in a mixed oligopoly

We study the optimal manipulation rules of a public firm’s objective function in a mixed oligopoly with imperfect product substitutability. We start with a baseline duopoly model and compare the solutions under quantity and price competition, and the way they are affected by product substitutability. This allows us to show that partial privatization, strategic delegation and other specific government’s commitments on the objective function of the public management can be looked at as special cases of these optimal rules, and to evaluate the viability of these policies under the two modes of competition. In this framework, we also discuss the equivalence between manipulation of the objective function and Stackelberg leadership. Since optimal manipulation rules change as new dimensions are added, we also derive the optimal rules under oligopoly, quadratic costs, and competition of international firms. This fairly general unified framework allows to discuss the impact of these factors on the government’s implementation policies of the optimal manipulation rules.