Price competition between subsidized organizations

Jan Bouckaert and Bruno De Borger

Journal of Economics, 2013, vol. 109, issue 2, 117-145

Abstract: Many firms and organizations compete for customers while at the same time receiving substantial funding from outside sources, such as government subsidies. In this paper, we study the effects of two commonly observed subsidy systems on the strategic behavior of competing firms. We compare a per unit subsidy to a subsidy allocated according to the firms’ market shares. We show that, holding the total subsidy budget constant, the per unit subsidy results in lower prices, higher output, lower profits and higher overall welfare as compared to the market-share based alternative. However, we also find that a market-share based subsidy makes collusive behavior between firms much harder. Our results suggest a potential trade-off between short-run and long-run objectives: subsidy systems designed to widen participation may favor collusive behavior. The welfare implications of this trade-off are discussed. Our findings have important policy implications for the design of subsidy systems. Copyright Springer-Verlag Wien 2013

Keywords: Subsidy allocation rules; Strategic behavior; Incentives to collude; D4.004; H8.002 (search for similar items in EconPapers)
Date: 2013
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Working Paper: Price competition between subsidized organizations (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:kap:jeczfn:v:109:y:2013:i:2:p:117-145

DOI: 10.1007/s00712-012-0307-3

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