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STRATEGIC TRADE POLICYAND
MANAGERIAL DELEGATION IN A MIXED DUOPOLY
FANG WEI (UNIVERSITY OF KITAKYUSHU)
1
fwei@kitakyu-u.ac.jp
2
•Tariff Protection Policy under Duopoly
cf. Brander-Spencer (1984)
---- Rent-Shifting Effect
•Separation of Ownership and Management
cf. Fershtman and Judd(1987), Sklivas (1987)
----Deviation From Profit Maximization
•Semipublic Firm in a Mixed Oligopoly
cf. Matsumura (1998)
----a weighed sum of firm profit and home social welfare
3
•
• Examine and Compare the Eq. Results in the Three Cases:
----Case N: No Managerial Delegation
ex. Chao and Yu (2006)
----Case G: Government Moves First
ex. Chang(2007)
----Case O: Owners Move First
Effect of Partial Privatization
Managerial Delegation Trade Policy
4
• How the Alternative Move Orders Affect Gov. and Owners’
• Strategic Decisions: Tax or Subsidy?
• Mutual Effect: Substitute of Complement?
• Payoffs
Separation of Ownership and Management
Import Tariff Policy
•
Mixed Duopoly
5
• Presence of Separation of Ownership and Management
•Strengthens (Weakens) Gov’s Tariff Incentive
When the Degree of Nationalization is Low (High).
• When Owners Move First (vs. When Gov. Moves First)
• Tariff Policy Managerial Delegation
• Foreign Product↓, Higher Home Profit↑, Home Welfare↓
• Acting as the First Mover(s) always yield a Higher Payoff
substitute
6
Import Tariff Managerial Delegation
Mixed Oligopoly
Brander and Spencer(1984)
Fershtman &Judd(1987),Sklivas(1987)
Matsumura(1998)
Das(1997)
Chen and Yu(2006)
Barros(1995)White(2001)
Chang(2007)
7
Home Government
tariff
Home Semipublic Firm Foreign Firm
Home Market
1st stage
output2nd stage
0Hc 0
Fc
0 0F Hc c
Assume:
[0,1]k
Home Market Model
8
Firm’s Profit Function:
Home Country’s Welfare Function:
Home Semipublic Firm’s Objective Function:
Foreign Private Firm’s Objective Function:
( , ; ) ( , ) (1 ) ( , )H H H HU q t k kW q t k q c
( , ) ( ) ( , )H H H FW q t CS Q q c tq
( , ) ( ( ) )i i i iq c P Q c q
( [0,1])k
( , ) ( ( ) )F F F Fq c P Q c q
9
Foreign Firm’s Output
Home Firm’s Output
kE
k
E
Home Firm’s Reaction Function
Foreign Firm’s Reaction Function
k Home Firm’s Product↑
Foreign Firm’s Product↓
t
tE
10
Tariff Incentives for Welfare Maximization:
Terms of Trade Effect
Resource Allocation Effect
Tariff Revenue Effect
Optimal Tariff: 0Nt
k Nt total output
Market Price
0 1 ( )H H FF H
W q qPq P c tt t t t
Resource Allocation
Effect
11
Owner
Home Government
Owner
1st stage
2nd stage
tariff
output
Manager Manager
Contract
3rd stage
HomeSemipublic Firm Foreign Firm
Home Market
12
Manager’s Incentive Contract Function:
as Owner’s Subsidy Equivalent
Firms Behave More Aggressively when Privatized
( [0,1])i
Define (1 )i i ic
(1 )i i i i i i i iM P q P c q
i i i iM P c q
as if Owner Subsidizes the FirmWhen 0i
13
FOC for Home Firm’s Payoff Maximization:
FOC for Foreign Firm’s Profit Maximization:
0FH H Hq
H F H
U U qq q
0HF F Fq
F H F
qq q
FOC as a Stackelberg Leader
• Effects of Managerial Delegation
• When k=0: Prisoner’s Dilemma ---Basu(1995)
• When k=1: Higher Welfare---Barros(1995)
14
FOC for Home Firm’s Payoff Maximization:
FOC for Foreign Firm’s Profit Maximization:
k Home Owner’s Subsidy Equivalent
Foreign Owner’s Subsidy Equivalent
0FH H Hq
H F H
U U qq q
0HF F Fq
F H F
qq q
15
Foreign Owner’s Subsidy Equivalent
Home Owner’s Subsidy Equivalent
1tE
E
Home Owner’s Reaction Function
Foreign Owner’s Reaction Function
t
t↑if k<1/4
k
t↑if k>1/4
2tEkE
0eH
t
dependent on k
0, 0, 0e e eF H F
t k k
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Terms of Trade Effect
Resource Allocation Effect
Tariff Revenue Effect
• Weakened in Delegation when k is small• Strengthened in Delegation when k is large
+ +
k Gt
Tariff Incentives for Welfare Maximization:
When k is small
Gt When k is large
17
Owner
Home Government
Owner1st stage
2nd stagetariff
output
Manager Manager
Contract
3rd stage
HomeSemipublic Firm Foreign Firm
Home Market
18
Optimal Tariff Decision:
eH t e
F t
• When Government Moves First (Case G)
Tariff Policy Managerial Delegation
• When Owners Move First (Case O)
Tariff Policy Managerial Delegation
Substitute if k>1/3
Complement if k<1/3
Substitute
19
FOC for Home Firm:
FOC for Foreign Firm:
Excess Competition Effect
Rent Shifting Effect
0e e e eH H H H F H
H H H F H H
U U q U q U tq q t
Tariff Imposition Effect
0OH
0e e e eF F F F H F
F F F H F F
q q tq q t
0OF
20
Summary(1): Import Tariff
A(k) C(k)
B(k) tG� tO � tN
tO� tG � tN
tO� tN � tG
tN� tO � tG
0.2 0.4 0.6 0.8 1.0k
�6
�4
�2
2
4
6
8
c
a
0.5
0
21
Summary(2): Owner’s Subsidy Equivalent
ΣHG � ΣH
O
ΣHG � ΣH
O
0.2 0.4 0.6 0.8 1.0k
0.40
0.45
0.50
0.55
0.60
0.65
c
a
0
22
Summary(3): Home Output
E(k)
G(k)
F(k)
q HN� qH
O � qHG
q HO� qH
N � qHG
q HO� qH
G � qHN
q HG� qH
O � qHN q H
N� qH
G � qHO
q HG� qH
N � qHO
0.2 0.4 0.6 0.8 1.0k
0.2
0.4
0.6
0.8
c
a
0
0.5
23
Summary(4): Foreign Output
qFN>qF
O � qFG
qFN>qF
G � qFO
qFG>qF
N � qFO
qFG>qF
O � qFN
�
H(k)
I(k)
J(k)0.2 0.4 0.6 0.8 1.0
k
�1.0
�0.5
0.5
1.0
c
a
0
24
Summary(5): Home Profit
ΠHO
ΠHN
ΠHG
0.2 0.4 0.6 0.8 1.0k
0.05
0.10
0.15
0.20
ΠH
0
25
Summary(6): Foreign Profit
ΠFO
ΠFG
ΠFN
0.340.2 0.4 0.6 0.8 1.0
k
0.002
0.004
0.006
0.008
0.010
0.012
ΠF
0
26
Summary(7): Home Welfare
WHO
WHN
WHG
0.2 0.4 0.6 0.8 1.0k
0.40
0.42
0.44
0.46
0.48
0.50
WH
0
27
Some Other Results• Foreign Owner’s Subsidization Incentive is
Dependent on the Move Orders
• For Home Owner
• For Foreign OwnerManagerial Delegation always yields Lower Profit
• For Home GovernmentFirst Mover Payoff is Much Larger than others
O N GH H H independent of k
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