CHAPTER ONE: INTRODUCTION
1.1 Research Background
Consumer surplus have been analyzed in recent years. It is generally believed that higher competition benefits consumers. However, Dinda and Mukherjee (2011) show that this may not be the case in an industry with asymmetric cost firms. A rise in the number of more cost inefficient firms makes the consumers worse-off in the presence of a welfare maximizing tax/subsidy policy. Therefore, we investigate the relationship between asymmetric cost and consumer surplus.
In the case of foreign ownership, a foreign firm could entry into other country's market by purchasing equity share of local domestic firm so that to be foreign stockholder. With an increase in the phenomenon of multinational enterprises, governments have imposed market-opening policies, set the level of foreign ownership.
In order to enhance the competitive power of domestic industry, government tries to open economy to attract foreign entry. It may reduce of the production cost of inefficient firms. With the government impose tax/subsidy policy and entry regulation of the open economy. While the government choose to foreign ownership ratio or tax/subsidy rate, on the other hand the implementation of entry regulation policies.
However, in an open economy, the impact of the profit transposition effect on the inefficient firms that decrease the social welfare. It has become the focus of much attention and debate. How the government to strike a balance between market competition and social welfare, it’s become an important issue.
1.2 Literature Review
The seminal paper by Mankiw and Whinston (1986) show that entry is socially
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excessive in oligopolistic industries with scale economies and no integer constraint, and it holds irrespective of the type of symmetric oligopoly game where the firms chooses their strategic variables simultaneously. However, Mukherjee (2011, forthcoming) considers an industry with a quantity setting leader and free entry of followers, and show that it is socially insufficient in the presence of scale economies if the marginal cost difference between the leader and the followers is large.
It is usually believed that higher market competition reduces price and make the consumer’s better-off (Metzenbaum 1993, Hausman and Leibtag 2007). Wang and Mukherjee (2012) show that entry of profit-maximizing firm’s increases profit of the incumbent firm, industry profit and social welfare at the expense of the consumers in mixed oligopoly setting. However, Dinda and Mukherjee (2011) show that considering an industry with asymmetric cost firms and rise in the number of more cost inefficient firms makes the consumers worse-off in the presence of a welfare maximizing tax policy. In both Lahiri and Ono (1988) and Klemperer (1988), higher competition, either due to lower marginal cost or due to entry of a firm, always makes the consumers better off. In contrast, if the number of more cost inefficient firms increases in our analysis, it makes the consumers better-off. In their paper, they ignored the foreign ownership policy between inefficient firms and efficient firms in their setting. However, Cato and Matsumura (2011) investigate how foreign penetration in the domestic market affects the privatization policy. They investigate the relationship between foreign penetration and domestic welfare. In the short-run, even if the government adjusts the degree of privatization to maximize domestic welfare, the achieved domestic welfare is affected by foreign penetration.
If there are market leaders or dominant firms, it is customary to consider Stackelberg competition with the first-mover advantage enjoyed by the market leaders,
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instead of a simultaneous game (Martin, 2001). Hence, the previous papers analyzing social efficiency of entry may not be appropriate in the presence of market leaders.
Mukherjee and Zhao (2009) show that if the incumbents differ in marginal costs and the entrants behave like Stackelberg followers, entry may benefit the incumbents who are relatively cost efficient while it always hurts the cost inefficient incumbents.
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CHAPTER TWO: Foreign Ownership and Stackelberg Competition
In Mukherjee (2011, forthcoming), they consider an industry with a quantity setting leader and free entry of followers, and show that it is socially insufficient in the presence of scale economies if the marginal cost difference between the leader and the followers is large.
In this chapter, we first briefly discuss the case of no entry cost as a benchmark, and then examine the case of entry in the presence of asymmetric cost. In section 2.1, introduces our basic model and section 2.2 consider the foreign ownership ratio into the followers under Stackelberg competition that is inexistence entry cost. In section 2.3, we consider foreign ownership ratio into the followers under Stackelberg competition at free entry. Section 2.4 concludes this chapter.
2.1 The Basic Model
We assume that the inverse market demand function is 𝑃 = 𝑎 − 𝑄, where P is price and 𝑄 = 𝑞𝑙+ ∑𝑛𝑖=1𝑞𝑖; 𝑞𝑖 is the quantities produced by firms i=1, 2,…, n, respectively. Consider a firm, called leader, which has invented a technology for a product, and can produce the product at the marginal cost c, which is assumed to be zero for simplicity. The leader enters the industry by incurring a fixed cost
. We
assume that each entrant can produce the product at the marginal cost of production c (>0). Hence, c measures the marginal cost difference between the leader and the entrants, and it may depend on the strength of the patent system and/or the complexity of the technology, which affect the benefit from knowledge spillover. However, if a potential entrant wants to produce the product, it needs to enter the market by5
incurring a fixed cost . If an entrant enters the market, we call it a follower.
We assume a >c competing like Stackelberg competition with a homogeneous product. Suppose that the investment by foreign investors into firm i lead to more efficient production technology relative to firm l. We assume 𝛼 is foreign ownership ratio, where 𝛼 ∈ [0, 1] represents the share of foreign capital ownership in firms i.
The former formulation indicates that as the proportion of firm i’s shares held by foreign owner’s increases, the production cost of firm i decreases.
Let us consider the following game. At stage 1, the leader enters the market. At stage 2, the entrants decide whether or not to enter the market. If there is no entry at stage 2, the leader produces like a monopolist at stage 3, and the profit is realized. If there is entry at stage 2, the leader behaves like a Stackelberg leader and the followers behave like Stackelberg followers at stage 3, and the profits are realized. We solve the game through backward induction.