Oligopoly Theory 2. Overview on Mixed Oligopoly 今日の講義の目的 （１）混合寡占の基本的な発想を理解する （２）厚生最大化行動が必ずしも厚生最大化をもたらさないメカニズムを理解する OT:Mixed Oligopolt

Outline of the Second Lecture 2-1 State-Owned Public Firm and Mixed Oligopoly 2-2 Public Monopoly 2-3 Production Substitution 2-4 Privatization and Welfare Implications 2-5 Partial Privatization 2-6 Long-Run Competition and Mixed Oligopoly OT:Mixed Oligopolt

Mixed Oligopoly, Mixed Market State-owned public firms compete against private firms OT:Mixed Oligopolt

Examples of mixed oligopoly in Japan Banking: Postal Bank, DBJ, Iwate Bank Housing Loan: the Public House Loan Corporation Life Insurance: Postal Life Insurance (Kampo) Overnight Delivery: Japan Post Energy: Public Gas Corps (Sendai,Narashino, Fukui,...) Broadcasting: NHK Telecommunication: NTT Tobacco: JT OT:Mixed Oligopolt

Examples of mixed oligopoly in other countries Banking: Postal Banks (New Zealand, U.K., Germany,...) Automobiles: Renault, VW Medicine: Public Institute in Brazil National Defense, Aviation: EADS, Airbus Airline: National airlines (Swiss, Belgian, France,　Italy, Indonesia...) Overnight Delivery: USSP Energy: Electricite de France, Gas de France, Macquarie, Broadcasting: BBC OT:Mixed Oligopolt

Differences between public and private firms (1)Public firms are less efficient than private firms. →Many empirical works do not support this view (and many other papers do support this view). (2) Difference of objective function →Private firms maximize their own profits, whereas public firms might care about social welfare. This paper, as well as many other papers on mixed oligopoly, assume that the public firm’s objective is welfare. OT:Mixed Oligopolt

Classical discussions of public firms(1) Why do public firms exist? (1) Natural monopoly (a) Public firm monopoly (b) Regulated private firm monopoly OT:Mixed Oligopolt

Natural Monopoly P D AC Ｙ OT:Mixed Oligopolt

Classical discussions of public firms(2) Why do public firms exist? (2) Unprofitable market (a) Public firm monopoly (b) Private firm monopoly with subsidy (compensation of deficit from public funds) OT:Mixed Oligopolt

Non-Profitable Market AC D Y OT:Mixed Oligopolt

Classical discussions on state-owned public firms Public firm is the monopolist In real economies, public firms are not always monopolists. Public firms do not always face significant economy of scale, which guarantees monopoly by the public firm. OT:Mixed Oligopolt

Problem(1) (1) How to provide incentives for welfare maximization? → The central issue for the public firm's monopoly If we assume that the public firm’s objective is welfare and the public firm is the monopolist, it is absolutely obvious that the first best is achieved. No research problem remains unsolved under such nonsense assumption. OT:Mixed Oligopolt

Problem(2) (2) Is the public firm’s welfare-maximizing behavior efficient?→never appears in public firm's monopoly. This question makes sense in mixed oligopoly since public firm’s welfare-maximizing behavior might worsen welfare through strategic interaction between public and private firms. →The central issue of mixed oligopoly OT:Mixed Oligopolt

De Fraja and Delbono(1989) (1) Cournot-type (quantity-setting competition, simultaneous-move, no product differentiation) (2) No cost difference between public and private firms. (3) Linear demand and quadratic cost function. (4) The private firm maximizes its own profits given outputs of other firms. (5) The public firm maximizes social welfare given outputs of other firms. →The public firm chooses its output level so that the price equals to its marginal cost. OT:Mixed Oligopolt

Results →Privatization of the public firm might improve welfare Compare the pure economy (after the privatization) to the mixed economy (before the privatization) →Privatization of the public firm might improve welfare WP >WM or WP<WM. OT:Mixed Oligopolt

Intuition (1) Privatization of the public firm reduces public firm's output q0 (2) Privatization increases private firm's output q1 →production substitution from the public firm to the private firm. (3) Privatization decreases total output q0 +q1 Effects (1) and (3) reduces welfare and effect (2) improves welfare. Effect (2) may be the strongest, leading to an improvement of welfare. OT:Mixed Oligopolt

Production Substitution reaction curve before privatization q1 reaction curve of the private firm reaction curve after privatization q0 q0 OT:Mixed Oligopolt

More detailed explanation of intuition Privatization of the public firm reduces q0 and increases q1 (production substitution). Before Privatization p=c0' >c1' →Public firm's marginal cost is higher than private firm's → Production substitution from public to private economizes production costs →Welfare-improving →Privatization reduces total production level and so consumer surplus → Welfare-reducing It is possible that the former effect dominates the latter effect. OT:Mixed Oligopolt

Why quadratic costs？ Constant marginal cost yields problems If marginal costs are constant and no cost differences exists, the public firm's monopoly yields the first best. → It is nonsense to discuss mixed oligopoly in such a circumstance. OT:Mixed Oligopolt

How to avoid this problem? (1) Using constant marginal costs and assuming cost differences between public and private firms. Mujumdar and Pal(1998),Pal(1998), Matsumura(2003a), Lu (2007) (2) Using increasing marginal costs. De Fraja and Delbono (1989), Fjell and Pal (1996),White (1996), Matsumura and Kanda (2005), Heywood and Ye (forthcoming) , Matsumura and Shimizu (forthcoming) OT:Mixed Oligopolt

How to avoid this problem? (3) Dropping the assumption of homogenous goods and or introducing spatial components. Cremer et al. (1992), Anderson et al. (1997), Matsumura and Matsushima (2003,2004), Matsushima and Matsumura (2003,2006), Fujiwara (2007), Heywood and Ye (forthcoming, forthcoming), Ishibashi et al (forthcoming) OT:Mixed Oligopolt

Contribution of De Fraja and Delbono (1) No cost difference between public and private firms → privatization does not improve production efficiency (2) Public firm's objection: welfare →No agency problem in the public firm (3) No additional policies by regulation, tax, or subsidy after privatization. ⇒Ideal circumstances for the existence of public firm. Against assumptions for the advocators of privatizations. → Nevertheless, privatization might improve welfare OT:Mixed Oligopolt

Partial Privatization De Fraja and Delbono: The public sector holds whole shares in the firm (nationalization) or the private sector holds whole shares in the firm (privatization) In the real world, we observe many firms with mixture ownership (partial privatization) NTT, JT, Iwate Bank, Hokuriku Electric Power Company, VW, Renault OT:Mixed Oligopolt

Matsumura (1998) (1) Cournot-type (quantity-setting competition, simultaneous-move, no product differentiation) (2) No restrictions on the cost differences between public and private firms. (3) The objective function of the public firm is the weight sum of social welfare and its own profits.（Partial Privatization) U0= (1-α) W+ απ0 (4) General demand and general costs. The government chooses s and s affects α. After observing α firms compete in the product market. OT:Mixed Oligopolt

Results α =0 is optimal only if it yields public monopoly. →If we allow partial privatization, no privatization (full nationalization) never becomes optimal. OT:Mixed Oligopolt

Intuition (1) Suppose that α =0. A slight increase in α reduces public firm's output q0 . Since p=c0', this effect is negligible (second order) ←envelope theorem (2) Increasing α increases private firm's output q1 Since p>c1', this effect is nonnegligible (first order) ⇒(2) dominates (1). OT:Mixed Oligopolt

Partial Privatization Free Entry: Matsumura and Kanda (2005) Product Differentiation: Fujiwara (2007) Spatial Model: Lu and Poddar (2007) Environmental Policy: Kato (2006), Ohori (2006) Anti-Trust: Barcena-Ruiz and Garzon (2003) Labour Market: Beladi and Chao (2006) Subsidization: Tomaru (2006) OT:Mixed Oligopolt

Matsumura and Kanda(2005) Long-run analysis on mixed oligopoly (1) Cournot-type (quantity-setting competition, simultaneous-move, no product differentiation) (2) No restrictions on the cost differences between public and private firms. (3) The objective function of the public firm is the weight sum of social welfare and its own profits. U0= (1-α) W+ α π0 (4) General demand and general cost (increasing marginal costs). (5) Free entry of private firms. OT:Mixed Oligopolt

自由参入市場 政府がそれを作る場合、設立費用としてF0かかる。 （１）政府が公企業（企業０）を作るか否かを決める。 政府がそれを作る場合、設立費用としてF0かかる。 （２）政府は企業０に対する持ち株比率s∈ [0,1]を決め、間接的にαをコントロールする。 （３）各私企業はαを観察し、参入するか否かを決める。各私企業は同質的である。 （４）私企業数が確定した後、参入した企業はCournot競争。 OT:Mixed Oligopolt

（２）から始まる部分ゲーム （最適なαの分析） αが与えられたもとで決まる内生変数： n（企業数）、q1（各私企業の生産量）、q0（公企業の生産量）、Ｑ（総生産量） これらの変数に関する比較静学 (a) q1、Ｑ ともにαと独立 (b) q0はαの減少関数。 (c) nはαの増加関数。 政府の持ち株比率sの増加は公企業の生産量を増加させ、参入企業数を減らすが、個別私企業の生産量と公・私企業の総生産量に影響を与えない。 OT:Mixed Oligopolt

Free entry equilibrium P private firm's residual demand private firm's AC Y private firm's output OT:Mixed Oligopolt

an decrease in α P private firm's residual demand private firm's AC Y Y private firm's output long run : reduction of the number of private firms OT:Mixed Oligopolt

Results α =0 is optimal.（公企業の生産量は適正である。） ←限界費用価格付けによって無駄な私企業の参入が抑えられるから。 OT:Mixed Oligopolt

Intuition α をほんの少し下げる。 (1) Qは不変→消費者余剰は不変 (2) q0が増加→ 公企業の限界費用・Δq0だけ費用増加。 (3) nが減少→私企業の平均費用・私企業の１社あたり生産量・Δnだけ費用増加 私企業の１社あたり生産量・Δn =Δq0 私企業平均費用＝価格＞公企業の限界費用 ⇒αの引き下げで生産費用が削減される。(Welfare-improving production substitution) OT:Mixed Oligopolt

公企業を設立すべきだったか ～公企業が黒字であれば公企業を参入させるべきだった。逆に赤字を生むような公企業は不要だった。 ・企業０の設立が経済厚生を改善する必要十分条件はπ＞ 0である ～公企業が黒字であれば公企業を参入させるべきだった。逆に赤字を生むような公企業は不要だった。 ・公企業と私企業の生産性が同じなら公企業は超過利潤を得られる。 OT:Mixed Oligopolt

No Cost Difference P AC public firm's output MC Y Y private firm's output Public firm obtains positive profits OT:Mixed Oligopolt