Mixed Oligopoly under Demand Uncertainty

Mahmudul Anam (manam@yorku.ca), Basher Syed A and Shin-Hwan Chiang (schiang@yorku.ca)
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Basher Syed A: Department of Economics, York University, bashers@qcb.gov.qa

The B.E. Journal of Theoretical Economics, 2007, vol. 7, issue 1, 26

Abstract: In this paper we introduce product demand uncertainty in a mixed oligopoly model and reexamine the nature of sub-game perfect Nash equilibrium (SPNE) when firms decide in the first stage whether to lead or follow in the subsequent quantity-setting game. In the non-stochastic setting, Pal (1998) demonstrated that when a public firm competes with a domestic private firm, multiple equilibria exist but the efficient equilibrium outcome is for the public firm to follow. Matsumura (2003a) proved that when the public firm's rival is a foreign private firm, leadership of the public firm is both efficient as well as SPN equilibrium. Our stochastic model shows that when the leader must commit to output before the resolution of uncertainty, multiple SPNE is possible. Whether the equilibrium outcome is public or private leadership hinges upon the degree of privatization and market volatility. More importantly, Pareto-inefficient simultaneous production is a likely SPNE. Our results are driven by the fact that the resolution of uncertainty enhances the profits of the follower firm in a manner that is well known in real option theory.

Keywords: mixed oligopoly; partial privatization; demand uncertainty (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (5)

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DOI: 10.2202/1935-1704.1345

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