Publication Date: September 2006
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.
Mixed oligopoly, Vertical diﬀerentiation, Factions, Party-unanimity, Nash equilibrium
JEL Classification Codes: D21, D43, D62, H82
Published in International Journal of Industrial Organization (May 2009), 27(3): 414-423 [DOI]