Pretend-But-Perform Regulation of a Duopoly under Three Competition Modes

Saglam, Ismail (2022): Pretend-But-Perform Regulation of a Duopoly under Three Competition Modes.

Abstract

This paper considers a duopoly with asymmetric costs and demand uncertainty to study the welfare effects of pretend-but-perform regulation (PPR) of Koray and Sertel (1988) under three modes of competition, involving the Cournot, conjectural variations, and supply function competitions. PPR induces a two-stage game where each firm declares in the first stage a cost report and produces in the second stage accordingly. Theoretically characterizing and numerically computing the equilibrium of this game, we show that the consumer surplus increases if PPR is applied under the Cournot competition and it decreases if PPR is applied under the other modes of competition.

• Item Type: MPRA Paper
• Language: English
• Keywords: Duopoly; regulation, Cournot, conjectural variations, supply function equilibrium.
• Subjects: D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets; L - Industrial Organization > L5 - Regulation and Industrial Policy > L51 - Economics of Regulation

References

Alkan A, Sertel MR (1988) The pretend-but-perform contracts in sharecropping. European Journal of Political Economy, 4:3, 397-423.

Anton JJ, Gertler PJ (2004) Regulation, local monopolies and spatial competition. Journal of Regulatory Economics, 25:2, 115-141.

Baron D, Myerson R (1982) Regulating a monopolist with unknown costs. Econometrica, 50:4, 911-930.

Barquin J, Centeno E, Reneses J (2004) Medium-term generation programming in competitive environments: A new optimization approach for market equilibrium computing. IEEE Proceedings – Generation, Transmission and Distribution, 151:1, 119-126.

Bowley AL (1924) The Mathematical Groundwork of Economics. Oxford University Press: Oxford.

Cournot AA (1838) Recherches sur les Principes Mathematiques de la Theorie des Richesses. Paris: Hachette.

Crew MA, Kleindorfer PR (1986) The Economics of Public Utility Regulation. MIT Press: Cambridge, MA.

Day CJ, Hobbs BF, Pang J‐S (2002) Oligopolistic competition in power networks: A conjectured supply function approach. IEEE Transactions on Power Systems, 17:3, 597-607.

Earle R, Schmedders K, Tatur T (2007) On price caps under uncertainty. Review of Economic Studies, 74:1, 93-111.

Escrihuela-Villar M, Gutierrez‐Hita C, Vicente‐Perez J (2020) Supply function competition in a mixed electric power market. Journal of Public Economic Theory, 22:4, 1151-1175.

Evrenk H, Zenginobuz EU (2010) Regulation through a revenue contest. Journal of Economics, 99:3, 211-237.

Frisch R (1933) Monopole, polypole - La notion de force dans l'economie. Nationaløkonomisk Tidsskrift, 71, 241-259. (Reprinted: Monopoly, polypoly: The concept of force in the economy in International Economic Papers, 1, 23–36, 1951.)

Garcia-Alcalde A, Ventosa M, Rivier M, Ramos A, Relao G (2002) Fitting electricity market models. A conjectural variations approach. In: 14th PSCC, Session 12, Paper 3, Sevilla, Spain.

Gradstein M (1995) Implementation of social optimum in oligopoly. Economic Design, 1, 319-326.

Green R, Newbery D (1992) Competition in the British electricity spot market. Journal of Political Economy, 100:5, 929-953.

Grimm V, Zöttl G (2010) Price regulation under demand uncertainty. B.E. Journal of Theoretical Economics, 10:1, pp. 0000102202193517041626.

Grossman S (1981) Nash equilibrium and the industrial organization of markets with large fixed costs. Econometrica, 49:5, 1149-1172.

Klemperer PD, Meyer MA (1989) Supply function equilibria in oligopoly under uncertainty. Econometrica, 57:6, 1243-1277.

Koray S (1985) Games of pretension and the β-core. Paper presented at the X. Bosphorus Workshop on Industrial Democracy, Istanbul, July.

Koray S, Saglam I (1999) Bayesian regulatory mechanisms: Corruption and learning. In: Kaser M, Sertel MR (eds) Contemporary economic issues economic behavior and design, vol 4, pp. 30-48, MacMillan Press: London

Koray S, Saglam I (2005) The need for regulating a Bayesian regulator. Journal of Regulatory Economics, 28:1, 5-21.

Koray S, Sertel MR (1983) Games of pretension. Research Paper ISS/E 83-03, Bogazici University, Istanbul.

Koray S, Sertel MR (1988) Regulating a duopoly by a pretend-but-perform mechanism. European Journal of Political Economy, 4:1, 95-115.

Koray, S, Sertel MR (1989) Limit theorems for recursive delegation equilibria. Research Paper Mathematics, 89/7, Middle East Technical University, Ankara, June 1989.

Koray S, Sertel MR (1990) Pretend-but-perform regulation and limit pricing. European Journal of Political Economy, 6:4, 451-472.

Koray S, Sertel MR (2022) Limit theorems for recursive delegation equilibria. Review of Economic Design, 26:4, 679-696.

Lan Y, Zhao R, Tang W (2013) A yardstick competition approach to a multi-firm regulation problem under asymmetric information. Journal of Computational and Applied Mathematics, 249, 24-36.

Liao CH, Tauman Y (2004) Implementation of the socially optimal outcome. The Manchester School, 72:5, 618-625.

Nash JF (1950) Equilibrium points in n-person games. Proceedings of the National Academy of Sciences USA, 36:1, 48-49.

Nash JF (1951) Non-cooperative games. Annals of Mathematics, 54:2, 286-295.

Newbery DM, Greve T (2017) The strategic robustness of oligopoly electricity market models. Energy Economics, 68:C, 124-132.

Okumura Y (2017) Asymmetric equilibria under price cap regulation. Journal of Economics, 121:2, 133-151.

Possajennikov A (2009) The evolutionary stability of constant consistent conjectures. Journal of Economic Behavior & Organization, 72:1, 21-29.

Ramos A, Ventosa M, Rivier M (1998) Modeling competition in electric energy markets by equilibrium constraints. Utilities Policy, 7:4, 233-242.

Reynolds SS, Rietzke D (2018) Price caps, oligopoly, and entry. Economic Theory, 66:3, 707-745.

Roques F, Savva N (2009) Investment under uncertainty with price ceilings in oligopolies. Journal of Economic Dynamics and Control, 33:2, 507-524.

Rudkevich A, Duckworth M (1998) Strategic bidding in a deregulated generation market: Implications for electricity prices, asset valuation and regulatory response. The Electricity Journal, 11:1, 73-78.

Scott T, Read EG (1996) Modelling hydro-reservoir operation in a deregulated electricity market. International Transactions in Operational Research, 3, 243-253.

Selten R (1965). Spieltheoretische behandlung eines oligopolmodells mit nach-fragetragheit. Zeitschrift far die gesamte Staatswissenschaft 121, 301--324; 667--689.

Sertel MR (1982) Workers and Incentives, (No. 140, Contributions to Economic Analysis). North-Holland: Amsterdam.

Tangeras TP (2002) Collusion-proof yardstick competition. Journal of Public Economics, 83:2, 231-254.

Ventosa M, Rivier M, Ramos A, Garcia-Alcalde A (2000) An MCP approach for hydrothermal coordination in deregulated power markets. In: IEEE PES Summer Meeting.

Vogelsang I (1988) A little paradox in the design of regulatory mechanisms. International Economic Review, 29:3, 467-476.

Wang GH (2000) Regulating an oligopoly with unknown costs. International Journal of Industrial Organization, 18:5, 813-825.