Mixed Oligopoly Equilibria When Firms' Objectives Are Endogenous

Philippe De Donder and John Roemer

No 1581, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We study a vertically differentiated market where two firms simultaneously choose the quality and price of the good 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 (search for similar items in EconPapers)
JEL-codes: D21 D43 D62 H82 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2006-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in International Journal of Industrial Organization (May 2009), 27(3): 414-423

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Related works:
Journal Article: Mixed oligopoly equilibria when firms' objectives are endogenous (2009)
Working Paper: Mixed Oligopoly Equilibria When Firms' Objectives Are Endogenous (2006)
Working Paper: Mixed Oligopoly Equilibria When Firms' Objectives Are Endogenous (2006)
Working Paper: Mixed Oligopoly Equilibria when Firms' Objectives are Endogenous (2006)
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