STRATEGIC TRADE POLICYAND

MANAGERIAL DELEGATION IN A MIXED DUOPOLY

FANG WEI (UNIVERSITY OF KITAKYUSHU)

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fwei@kitakyu-u.ac.jp

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•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

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•

• 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

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• 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

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• 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

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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)

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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

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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

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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

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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

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Owner

Home Government

Owner

1st stage

2nd stage

tariff

output

Manager Manager

Contract

3rd stage

HomeSemipublic Firm Foreign Firm

Home Market

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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

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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)

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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

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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

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Owner

Home Government

Owner1st stage

2nd stagetariff

output

Manager Manager

Contract

3rd stage

HomeSemipublic Firm Foreign Firm

Home Market

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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