Mixed oligopoly equilibria when firms' objectives are endogenous De Donder, Philippe; Roemer, John E.

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De Donder, Philippe ; Roemer, John E.
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International Journal of Industrial Organization
Oligopolies - Mathematical models.; Oligopolies -- Analysis; Markets - Mathematical models.
To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.ijindorg.2008.11.003 Byline: Philippe De Donder (a), John E. Roemer (b) Keywords: Mixed oligopoly; Privatization; Vertical differentiation; Factions; Party-unanimity Nash equilibrium Abstract: We study a vertically differentiated market where two firms simultaneously choose the quality and price of the good they sell and where consumers may 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 the Nash equilibrium between firms when there is efficient bargaining between the two factions inside both firms. 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 bargaining weight of the welfare-maximizing faction. We show that equilibrium welfare increases with this bargaining weight, especially if consumers care a lot for the average quality of the goods provided. Author Affiliation: (a) Toulouse School of Economics, (IDEI and GREMAQ-CNRS), France (b) Yale University, United States Article History: Received 18 September 2007; Revised 18 July 2008; Accepted 14 November 2008 Article Note: (footnote) [star] This paper has been presented at the ESF Exploratory Workshop on "Designing Partnerships between Government and the Private Sector: Cross-Disciplinary Perspectives" (Bristol, June 2006). We thank participants as well as two referees for their comments and suggestions. This paper has been revised while the first author was visiting Yale University. He wishes to thank Yale's Economics Department for its hospitality. The usual disclaimer applies.
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