18 research outputs found
Price Discrimination and Social Welfare with Demand Uncertainty
Price, output and welfare erects of third-degree price discrimination is analyzed in the context of a risk-averse monopolist, who commits to xed prices before the revelation of random and potentially correlated demands. Assuming the disturbance term to be additive, white noise and the monopolist to have a quadratic (mean-variance) utility function, we show that price discrimination may occur with identical expected demands, the relatively risky but price insensitive market may be charged the lower price and despite linear demands, aggregate expected output may fall while social welfare rises. All of these results, which run counter to those in the deterministic model, are shown to be driven by the asymmetry in the revenue and risk characteristics of the markets and the willingness of the monopolist to trade increased level for reduced risk of expected prot in a manner similar to portfolio choice with risky and correlated assets. Key Words: Monopoly (D42), Monopolization Strategies (L12), Decision Making under Risk and Uncertainty (D81)
Mixed Oligopoly under Demand Uncertainty
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 the 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
Mixed Oligopoly under Demand Uncertainty
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 the 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
On the Policy Intervention in the Harris-Todaro Model with Intersectoral Capital Mobility.
In the well-known analysis of the Harris-Todaro (1970) model, with perfect intersectoral mobility of capital, W. M. Corden and R. Findlay (1975) observe that an agricultural wage subsidy must improve welfare (over the laissez-faire level) as long as there is any urban unemployment. However, the present paper demonstrates that this conventional wisdom will not be valid if the shadow price of labor is negative, a possibility that can not be ruled out in the context of the Corden-Findlay model. Copyright 1988 by The London School of Economics and Political Science.