Strategic Investment and the Co-Existence of Labor-Managed and Profit-Maximizing Firms

Abstract

We examine firm profitability in mixed duopoly equilibrium with one labor-managed (LM) firm and one profit-maximizing (PM) firm, and with strategic investment. Conventional wisdom suggests that firms deviating from profit-maximization will suffer forced exit in the long run. We reverse this conclusion. In mixed LM-PM duopoly with strategic investment no equilibrium can have both firms making zero profits, and PM profitability implies LM profitability, but not conversely. Adverse parameter shifts would cause the PM firm to exit first. Empirical evidence is consistent with this prediction of relatively robust market survivability of LM firms.

JEL Classification: D43, L13, P13, P51