Informal input sector and its impact on output market competitiveness

Prasun Bhattacharjee, Biswajit Mandal and Ravi Radhakrishnan
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Prasun Bhattacharjee: East Tennessee State University
Ravi Radhakrishnan: Centre College

Indian Economic Review, 2022, vol. 57, issue 2, No 13, 553-564

Abstract: Abstract This paper investigates the nature of output market conduct that arises when firms have the opportunity of sourcing input from the informal sector. We assume a duopoly setup where two firms produce horizontally differentiated final goods. Firms have access to a formal and an informal sector to procure input. The formal sector is regulated and has government recognized settlements, while the informal sector is unregulated. Procuring inputs from the informal sector leads to lower cost of production for the final good, but the incomplete nature of contracts in this sector involves additional costs. Given the probability of contract defection in the informal sector, we analyse various output market equilibrium results in the presence of the informal input suppliers and compare these outcomes with standard models of Bertrand competition and monopolistic coalition.

Keywords: Informality; Bertrand model; Collusion; Contract incompleteness; Monitoring cost (search for similar items in EconPapers)
JEL-codes: D23 D43 D86 E26 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s41775-022-00146-9

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