Mixed Oligopoly Equilibria When Firms' Objectives are Endogenous

30 Pages Posted: 29 Dec 2006

See all articles by Philippe De Donder

Philippe De Donder

CNRS, Toulouse School of Economics

John E. Roemer

Yale University - Department of Political Science; Yale University - Cowles Foundation

Multiple version iconThere are 2 versions of this paper

Date Written: October 2006

Abstract

We study a vertically differentiated market where two firms simultaneously choose the quality and price of the goods they sell and where consumers also care for the average quality of the goods supplied. Firms are composed of two factions whose objectives differ: one is maximizing profit while the other maximizes revenues. The equilibrium concept we model, called Firm Unanimity Nash Equilibrium (FUNE), corresponds to Nash equilibria between firms when there is efficient bargaining between the two factions inside both firms. One conceptual advantage of FUNE is that oligopolistic equilibria exist in pure strategies, even though the strategy space (price, quality) is multi-dimensional. We first show that such equilibria are inefficient, with both firms underproviding quality. We then assume that the government takes a participation in one firm, which introduces a third faction, bent on welfare maximization, in that firm. We study the characteristics of equilibria as a function of the extent of government's participation. Our main results are twofold. First, government's participation in the firm providing the low quality good decreases efficiency while participation in the firm providing the high quality good increases efficiency. Second, the optimal degree of government's participation in the high-quality firm increases with how much consumers care for average equality.

Keywords: Mixed oligopoly, vertical differentiation, factions, party-unanimity Nash equilibrium

JEL Classification: D21, D43, D62, H82

Suggested Citation

De Donder, Philippe and Roemer, John E., Mixed Oligopoly Equilibria When Firms' Objectives are Endogenous (October 2006). CEPR Discussion Paper No. 5900. Available at SSRN: https://ssrn.com/abstract=954120

Philippe De Donder (Contact Author)

CNRS, Toulouse School of Economics ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

HOME PAGE: http://https://www.tse-fr.eu/people/philippe-de-donder

John E. Roemer

Yale University - Department of Political Science ( email )

Box 208269
New Haven, DC 06520-8269
United States
203-432-5249 (Phone)
203-432-6196 (Fax)

HOME PAGE: http://pantheon.yale.edu/~jer39/

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

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