Asymmetric Firms Research Articles

Working along both lines? The relationship between government green publicity and emissions tax

Emissions reduction has long been the most concerning environmental issue. To promote emissions reduction among firms, governments have adopted mandatory tools such as emissions tax and voluntary guidance such as government green publicity. This paper investigates the interaction between emissions tax and government green publicity and analyzes the optimal decisions when the government combines these two policies. The results show that these two policies are mutually reinforcing, that is, the enhancement of one leads to the enhancement of the other. Moreover, although these two policies are complements in reducing emissions, it may be not wise to combine them to improve social welfare. Specifically, when the emissions damage is small, these two policies are substitutes in improving social welfare. More surprisingly, this substitutive relationship will increase with the baseline emissions level. This suggests that governments combining these two policies may not suitable for addressing high-pollution industries. When governments combine these two policies, intuitively, the emissions tax level and publicity degree will increase with tax implement efficiency. However, the results show that when the emissions damage is relatively large, the emissions tax level and publicity degree will decrease with tax efficiency. We also find that under asymmetric firms, heightened competition will improve the social welfare and the strategic complementarity of the two policies, albeit at the cost of firms’ profits. Moreover, we analyze the influence of budget constraints, revealing that as the budget limit level decreases, the strategic complementarity can initially decline but subsequently exhibit an upward trend.

Technical Note: Multimarket Cournot Equilibria with Heterogeneous Resource-Constrained Firms

Charactering Cournot equilibria in settings with asymmetric firms is a challenging problem. In their technical note “Multimarket Cournot Equilibria with Heterogeneous Resource-Constrained Firms,” R. Caldentey and M. Haugh consider competition in a multimarket setting where firms are subject to varying budget or capacity constraints. They explicitly characterize the unique equilibrium in this environment by introducing the concepts of augmented and cutoff budgets for firms and markets. In particular, they show that a firm operates in a particular market if only if its augmented budget surpasses the market’s cutoff budget. They also investigate how the equilibrium properties change as the number of firms N varies while maintaining a fixed aggregate budget. They show via a numerical study that increasing N leads to a higher total output across all markets but that this monotonicity need not hold individual at the level of an individual market level. They also show that, although the firms’ cumulative payoff decreases in N, the consumer surplus and social surplus increase in N.

Endogenous price discrimination with asymmetric firms

We explore a third-degree spatial price discrimination model within the context of asymmetric duopolies. We find that if the degree of asymmetry is small, both firms charge uniform price is the unique sub-game perfect Nash equilibrium. As the degree of asymmetry reaches intermediate, there exists no pure strategy sub-game perfect Nash equilibrium. In the mixed strategy equilibrium, both firms price discriminate with certain probability. When the degree of asymmetry is large, there exists one or two asymmetric equilibria: the advantaged firm price discriminating and the disadvantaged firm uniformly pricing IN and vice versa in the other NI. In both equilibria, the price-discriminating firm consistently benefits, and the uniform-pricing firm also experiences higher profits when the degree of asymmetry is large, despite being driven out of the smaller market. Moreover, when the asymmetry is large enough, social welfare can also be higher.

Firm Heterogeneity and International Trade Liberalisation: A Generalized Cournot Oligopoly Approach

Abstract The main goal of this article is to contribute to the theoretical analysis of international trade under imperfect competition using the Cournot oligopoly model with heterogeneous firms. In particular, our objective is to provide some insights into the role of cost asymmetry in studying the effects of trade liberalisation in the Cournot oligopoly framework. In order to introduce firm heterogeneity into the oligopoly model we use the generalised Cournot framework with asymmetric firms that differ in terms of their productivity, levels of output and market shares. We show that trade liberalisation leads to the elimination of less productive firms and results in lower equilibrium prices, higher sales per firm and lower markups in the industry.

Strategic incentives for comparative advertising investments in non-zero-sum competition and economic consequences

Persuasive advertising is viewed as an effective tool to affect willingness-to-pay of customers for a firm’s product. In their use of persuasive advertising, firms typically face the choice of whether to tout the benefits of their own products without mentioning rival products (self-promotional advertising) or make references to rival products while promoting their own products (comparative advertising). A concomitant (and intrinsic) issue in the use of comparative advertising is whether to portray rival products negatively or positively and the level of comparative intensity (the valence of comparative advertising). Although it is often criticized and disapproved of by business decision makers and its effectiveness has been a subject of contentious debate, comparative advertising is used prevalently by firms in consumer goods markets. In this paper, we examine the strategic incentives of competing firms to abandon their self-promotional advertising in favor of comparative advertising, the ways in which they choose a positive or negative valence in their comparative advertising, and the economic consequences of these decisions. We consider a simultaneous (and a leader-follower Stackelberg) game between two asymmetric firms vying for customers in a market that is not characterized by zero-sum competition. We also study the possibility that comparative advertising elicits positive or negative market externalities on the advertised product. We seek market- and channel-based explanations for why firms may opt to undertake comparative advertising (in lieu of self-promotional advertising) and use its constructive or combative form. We show that the use of comparative advertising can be an effective tactic in attaining certain objectives and when carefully executed in certain ways, and detrimental to not only the advertising firm but also the product category in other ways.

Fixed costs, market power and revenue shares of the asymmetric firms

Fixed costs, market power and revenue shares of the asymmetric firms

Endogenous Price Discrimination with Asymmetric Firms

Endogenous Price Discrimination with Asymmetric Firms

Nash equilibria of the pay-as-bid auction with K-Lipschitz supply functions

We model a system of n asymmetric firms selling a homogeneous good in a common market through a pay-as-bid auction. Every producer chooses as its strategy a supply function returning the quantity S(p) that it is willing to sell at a minimum unit price p. The market clears at the price at which the aggregate demand intersects the total supply and firms are paid the bid prices. We study a game theoretic model of competition among such firms and focus on its equilibria (Supply function equilibrium). The game we consider is a generalization of both models where firms can either set a fixed quantity (Cournot model) or set a fixed price (Bertrand model). Our main result is to prove existence and provide a characterization of (pure strategy) Nash equilibria in the space of K-Lipschitz supply functions.

On the green subsidies in a differentiated market

Government subsidies play an important role in promoting the development of green products. This paper examines the impact of subsidies on competing firms, consumers and the environment in a horizontally differentiated market. Taking all stakeholders into consideration, the optimal subsidy level is solved to maximize social welfare. Compared with the no subsidy case, we show that subsidies always make consumers better, however, this welfare improvement may come at the expense of firm profits and environmental benefits. Specifically, when products are highly substitutable and consumers’ environmental awareness is great, subsidies can induce competing firms to over-invest in green R&D and produce more quantities and thus leading to reduced firm profits. Moreover, subsidies would widen the gap between asymmetric firms, making those firms in a weak competitive position even more disadvantaged. As for the environment, we find that for industries with high levels of emissions per-unit of output, the negative effect of subsidies to induce more production/consumption would dominate the positive effect of the improvement in product greenness, leading to environmental degradation. As a result, subsidies are optimal for clean industries, while punitive policies that limit production and consumption may be more effective for those dirty industries. We also compare ad valorem subsidies and green R&D subsidies, showing that for the same amount of subsidies, an ad valorem subsidy is more in the interest of firms, while consumers are better off under the R&D subsidy policy as it increases the competition in green efforts more directly.

The impact of network topology and market structure on pricing

We develop a two-stage oligopolistic network competition model where, first, firms simultaneously determine their prices, and, second, consumers connected through a network determine their consumption. We show that firms price-discriminate consumers based on the consumer's network position. Denser networks (i.e., network topology) reduce prices, whereas increased competition (i.e., market structure) reduces prices only when competition is weak. However, the prices charged for the most influential consumers can increase with the number of firms when competition is very fierce and when there are strong network externalities. We also show that increasing competition always leads to lower firm profits, whereas equilibrium profits respond to the number of firms more sensitively when the network is denser or the externalities parameter is larger. Finally, we study the effects of network topology and market structure on price dispersion and determine the optimal network structure based on the perspective of both firms and consumers. We also extend the baseline model to allow for asymmetric firms and product compatibility.

Corporate social responsibility and endogenous competition structure in an industry composed of asymmetric firms with managerial delegation

ABSTRACT This study focuses on the endogenous choice between price and quantity contracts in a duopoly composed of asymmetric firms that care about corporate social responsibility (CSR) with managerial delegation. We find that the optimal strategy of a firm that cares about social welfare does not depend on both the degree of homogeneity of goods and the degrees of importance of CSR, while the that of one that cares about consumer surplus strictly depends on the degree on importance of CSR within its rival firm.

Welfare Improving Horizontal Mergers in Successive Oligopoly*

We study welfare effects of horizontal mergers in a successive oligopoly model with general demand. We find that downstream mergers can increase welfare if they reduce input price. In an environment with asymmetric upstream firms, lower input price reallocates some input production from cost‐inefficient upstream firms to cost‐efficient ones. In the presence of fixed cost and free entry, lower input price rationalizes the upstream sector and decreases average cost of production for each upstream firm. Both reallocation and rationalization can improve welfare. We identify necessary and sufficient conditions for welfare‐improving horizontal mergers and explore how demand curvature, market structure and Herfindahl index (in case of asymmetric firms) affect these conditions. The possibility of consumer surplus improvement and upstream mergers is also explored.

DOES ISLAMIC FINANCE FOLLOW FINANCIAL HIERARCHY? EVIDENCE FROM THE MALAYSIAN FIRMS

Focusing on the sukuk market in Malaysia from 2000–2017, this study estimates the degree of each sample issuer information asymmetry and investigates how it influences sukuk issuance and how it differs by sukuk type. First, we find that a cost-plus-sales-based Murabahah sukuk is available for all sukuk issuers, even though the degree of information asymmetry is high. Second, a lease-based Ijarah sukuk can be chosen by high information asymmetric firms only when the firm has qualified collateral assets. Third, only a low information asymmetric firm can choose a profit-and-loss sharing-based Musyarakah sukuk. Therefore, we conclude that sukuk issuance also follows a financial hierarchy in accordance with the agency costs of each financial methodology required when a specific sukuk is chosen.

Allocation of the Public R&D Budget: The Impact of International Competitive Advantages and R&D Alliances

I consider a two-country model, in which two asymmetric firms invest in R&D to increase their competitiveness and compete over the supply of a homogeneous product, and the government grants R&D subsidies to increase welfare. In this setting I show that optimal R&D policy is affected by industrywide international competitive advantages. Similar to conventional wisdom on strategic trade policy, competitive advantages have a positive impact on the optimal amount of R&D subsidy in the case of R&D competition. With international R&D cooperation, this conclusion is reversed: subsidising the more competitive firm may have, if any, very little impact on domestic welfare.

The Ownership Concentration − Innovation Nexus: Evidence From SMEs Around The World

ABSTRACT This study investigates whether ownership concentration improves or impedes firm innovation using a sample of small and medium-sized enterprises (SMEs) spanning 95 countries worldwide. We find that higher ownership concentration is associated with a lower likelihood of introducing innovative activities. Further, results reveal that concentrated ownership has detrimental impacts on innovation for firms with a higher degree of asymmetric information and firms led by less experienced managers. We also show that the negative association between ownership concentration and innovation only exists for financially constrained firms (i.e., younger enterprises and SMEs with high financing obstacles) and those with the highly concentrated ownership structure. Lastly, evidence suggests that institutional development alleviates the negative impact of ownership concentration on innovation.

Market Effects of Loyalty and Cost Factors in a Price Discrimination Environment

Product cost heterogeneity across firms and loyalty models of customers are two topics that have garnered limited attention in prior studies on competitive price discrimination. Costs are generally assumed negligible or equal for all firms, and loyalty is modeled as an additive bias in customer valuations. We extend these previous treatments by considering cost asymmetry and a richer class of loyalty models in a game-theoretic model involving two asymmetric firms. Here firms may incur different non-negligible product costs, and customers can have firm-specific loyalty levels. We characterize the effects of loyalty levels and product cost difference on market outcomes such as prices, market share and profits. Our analysis and numerical simulations shed new light on market equilibrium structures arising from the interplay between product cost difference and loyalty levels.

Competitive Effects of Horizontal Mergers With Asymmetric Firms

This paper aims at investigating the impacts of introducing cost asymmetry in horizontal merger analysis. In the absence of efficiency gains, previous literature states the negative competitive effects of a merger between symmetric firms. We go beyond the literature and show that the result is only likely to hold for a low level of asymmetry. In particular, we build a tractable model with three firms in which one of them has a different cost structure. After merging two symmetrical firms, the outsider always reduces (increases) price (investments), while the insiders choose the opposite strategies. In particular, if the outsider's cost is sufficiently low, the increase in its investment could outweigh the decreases in those of the merged entity, leading to higher total investments post-merger. Similarly, consumer surplus could be improved thanks to the decrease in the outsider's price.

Dynamic competition in electricity markets under uncertainty

Abstract We study discrete-time infinite-horizon imperfect competition between asymmetric firms producing from different technologies. Specifically, one firm produces from hydroelectric units and the others operate thermal generators. This type of structure is common in some electricity markets. What makes this research interesting is that firms have different types of constraints, face different kinds of uncertainties, need to allocate their resources over time, and yet produce strategically. For the renewable energy holder, the key issue is how to allocate water between current and future electricity generation given the thermal firms' strategic actions along with demand and/or water inflow uncertainties. We analyze equilibrium outcomes (e.g., the price distribution) and market inefficiencies stemming from both production constraints and imperfect competition. We show that equilibrium price volatility and skewness are generally lower than optimal, although average price is higher than optimal. The hydro producer under-utilizes the available water, which leads to more water being available to smooth price fluctuations. However, in the extreme case of water inflows so plentiful that the hydro firm is never constrained, prices can be more volatile than optimal. We also demonstrate that the lack of social optimality of the market outcome is tempered by the capacity constraints: the welfare loss under the oligopoly market structure is much less than would occur in the absence of water and capacity constraints. These results are demonstrated using numerical simulations of the infinite horizon game, one of which is calibrated to match the characteristics of the Ontario wholesale electricity market.

Endogenous research and development spillovers and asymmetric firms

We examine an asymmetric research and development (R&D) duopoly, where firms differ in their research and development productivity, one firm being technologically advanced. We find that both firms can benefit and increase their profitability by entering into a voluntary information sharing agreement despite their asymmetry and highlight the conditions needed for such an agreement to take place.

Sequential product positioning on a platform in the presence of network effects

We analyze in a game-theoretic framework the sequential product positioning problem of two asymmetric firms with different quality levels on a platform when network effects present, where the negative influences of product differentiation on product compatibility are explicitly considered. We obtain closed-form solutions to the positioning problem, and reveal that whether the traditional wisdom of positioning in the mass market is still optimal for the leader in our setting depends not only on whether it has a quality advantage over the follower, but also on the intensity of the network effects. For the follower, as the network effects increase or its quality advantage increases, its product positioning approaches the mass product; otherwise, the opposite is true. We also observe that the optimal degree of differentiation has certain robustness with respect to the order of the positioning decisions. In addition, we find that the degree of product differentiation in the sequential positioning scenario is lower than in the simultaneous positioning scenario, while it is higher than in the social welfare maximization scenario. This research provides concrete guidelines for high-tech firms to make pertinent strategic decisions, and lays a foundation for platform managers to design policies to coordinate its members.