Arghya Ghosh

Privatization in a Small Open Economy with Imperfect Competition

We look at privatization in a general equilibrium model of a small, tariff-distorted, open economy. There is a differentiated good produced by both private and public sector enterprises. A reduction in government production in order to cut losses from such production raises the returns to capital and increases the tariff revenue, which are welfare improving. However, privatization also leads to lower wages and possibly fewer private brands. This lowers workers’ welfare, which may make privatization politically infeasible. Privatization can improve workers’ welfare with complementary reforms, e.g., attracting foreign investment or trade liberalization.

Competitor collaboration and product distinctiveness

Competitors often collaborate by sharing a part of value-creating activities such as technology development, product design, and distribution, which are important elements for creating product distinctiveness. Competitor collaborations have recently been regarded as crucial issues by antitrust authorities. Although collaboration between competitors reduces their product distinctiveness, it may increase the distinctiveness between their products and a non-collaborators product. Also, intensified competition between collaborators lowers their prices and imposes downward pressure on non-collaborators pricing strategy. We demonstrated that the interaction between these effects yields rich antitrust implications for competitor collaborations and a new perspective on welfare consequences of partial ownership arrangements.

The Possibility of Welfare Gains with Capital Inflows in a Small Tariff‐Ridden Economy

Capital inflows with full repatriation give rise to welfare improvement possibilities in a small tariff distorted economy when imperfect competition and increasing returns are allowed for in one sector of a two sector model. This is in contrast to the Brecher-Alejandro proposition that capital inflows with full repatriation are necessarily Immiserizing for a small tariff-ridden economy. We find that welfare gains chances are greater (a) the higher the expenditure share of the capital intensive differentiated good (b) the lower the substitutability between brands and (c) the lower the share of tariff revenue in national income.

The Babu and the Boxwallah: Managerial Incentives and Government Intervention in a Developing Economy

In developing economies a firms strategy is directed more often at the government than at other competing firms. As an initial step towards modeling such interactions this paper considers a situation where a government confronts a monopoly. The latter chooses price and maximizes profit and the former chooses a tax rate and maximizes tax revenue. The government and the monopoly can delegate the final decision-making to, respectively, a bureaucrat and a manager. The incentive equilibrium of the model is characterized. it is shown that this kind of industrial setting is likely to exhibit greater inefficiencies than that which arises in standard models. Copyright 1997 by Blackwell Publishing Ltd

Privatization, Underpricing, and Welfare in the Presence of Foreign Competition

We analyze privatization in a differentiated oligopoly setting with a domestic public firm and foreign profit-maximizing firms. In particular, we examine pricing below marginal cost by public firm, the optimal degree of privatization and, the relationship between privatization and foreign ownership restrictions. When market structure is exogenous, partial privatization of the public firm improves welfare by reducing public sector losses. Surprisingly, even at the optimal level of privatization, the public firms price lies strictly below marginal cost, resulting in losses. Our analysis also reveals a potential conflict between privatization and investment liberalization (i.e., relaxing restrictions on foreign ownership) in the short run. With endogenous market structure (i.e., free entry of foreign firms), partial privatization improves welfare through an additional channel: more foreign varieties. Furthermore, at the optimal level of privatization, the public firms price lies strictly above marginal cost and it earns positive profits.

Reversal of Bertrand-Cournot Rankings in the Presence of Welfare Concerns

We revisit the comparison between Bertrand and Cournot competition in a symmetric differentiated oligopoly where each firm maximizes a weighted average of its own profit and welfare. Under very general specifications, Bertrand competition yields higher prices and profits, and lower quantities, consumer surplus, and welfare than Cournot when the weight on profit is lower than a threshold value. The threshold weight on profit (welfare) can be arbitrarily close to unity (zero) for both quadratic and CES utilities. Particularly striking is the following asymptotic result for CES: irrespective of the degree of substitutability, the threshold weight on profit tends to unity as the number of firms approaches infinity.

Comparing Bertrand and Cournot Outcomes in the Presence of Public Firms

We revisit the classic comparison between Bertrand and Cournot outcomes in a mixed market with private and public firms. A departure from the standard setting, i.e., one where all firms maximize profits, provides new insights. A welfare-maximizing public firms price is strictly lower while its output is strictly higher in Cournot competition. And whereas the private firms quantity is strictly lower in Cournot (as in the standard setting), its price can be higher or lower. Despite this ambiguity, both firms, public and private, earn strictly lower profits in Cournot. The consumer surplus is strictly higher in Cournot under a linear demand structure. All these results also hold with more than two firms under a wide range of parameterizations. The ranking reversals also hold in a richer setting with a partially privatized public firm, where the extent of privatization is endogenously determined by a welfare-maximizing government. As a by-product of our analysis, we find that in a differentiated duopoly setting, partial privatization always improves welfare in Cournot but not necessarily in Bertrand competition.

Cooperative and non-cooperative R&D and trade costs

We examine the effect of trade liberalization on the level and mode of R&D in an international duopoly setting. Firms have the choice to invest in R&D either independently or cooperatively. A reduction in trade cost increases R&D irrespective of the mode of R&D. However, an increase in spillovers has ambiguous effects on R&D. More precisely, we find that an increase in spillover leads to higher R&D activity under cooperation but lower R&D activity under non-cooperation. Concerning cooperation versus non-cooperation, we find that firms prefer cooperation only if trade costs are low. Consumers are better off under cooperation if spillovers are high. We find that there can be a mismatch between private and social incentives. If spillovers are low and trade costs are low then cooperation might be privately profitable but socially undesirable. On the other hand, if there are large spillovers and high trade costs then cooperation may be socially desirable but not privately profitable.

Knowledge Transfer and Partial Equity Ownership

When firms form an alliance, it often involves one firm acquiring an equity stake in its alliance partner. Such an alliance weakens competition, but induces knowledge transfer between partner firms. We explore oligopoly models that capture the link between knowledge transfer and partial equity ownership (PEO), where alliance partners can choose the level of PEO to connect themselves. PEO, merger and independence are all nested in our model, where PEO can arise in equilibrium and the endogenously determined level of PEO can benefit consumers and/or society. We identify conditions under which antitrust authorities would prohibit, partially permit, or permit PEO.

Horizontal Mergers in the Presence of Vertical Relationships

We study welfare effects of horizontal mergers under a successive oligopoly model and find that downstream mergers can increase welfare if they reduce input prices. The lower input price shifts some input production from cost-inefficient upstream firms to cost-efficient ones. Also, the lower input price makes upstream entry less attractive, reduces the number of upstream entrants, and decreases their average costs in the presence of fixed entry costs. We identity necessary and sufficient conditions for a reduction in input prices and welfare-improving horizontal mergers under a general demand function. Qualitative nature of our findings remains unchanged for upstream mergers.