STRATEGIC TRADE POLICY AND MANAGERIAL DELEGATION IN A MIXED DUOPOLY FANG WEI (UNIVERSITY OF KITAKYUSHU) fwei@kitakyu-u.ac.jp 1
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 2
Examine and Compare the Eq. Results in the Three Cases: ----Case N: No Managerial Delegation ex. Chao and Yu (26) ----Case G: Government Moves First ex. Chang(27) ----Case O: Owners Move First Effect of Partial Privatization Managerial Delegation Trade Policy 3
Separation of Ownership and Management Mixed Duopoly Import Tariff Policy How the Alternative Move Orders Affect Gov. and Owners Strategic Decisions: Tax or Subsidy? Mutual Effect: Substitute of Complement? Payoffs 4
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) substitute Tariff Policy Managerial Delegation Foreign Product, Higher Home Profit, Home Welfare Acting as the First Mover(s) always yield a Higher Payoff 5
Import Tariff Managerial Delegation Mixed Oligopoly Brander and Spencer(1984) Fershtman &Judd(1987), Sklivas(1987) Matsumura(1998) Das(1997) Chen and Yu(26) Barros(1995) White(21) Chang(27) 6
1 st stage Home Government k [,1] tariff Home Market Model Home Semipublic Firm Foreign Firm ch c F 2 nd stage output Home Market Assume: c c F H 7
Firm s Profit Function: ( qc, ) ( PQ ( ) c) q i i i i Home Country s Welfare Function: W ( q, t) CS( Q) ( q, c ) tq H H H F Home Semipublic Firm s Objective Function: U ( q, t; k) kw ( q, t) (1 k) ( q, c ) H H H H Foreign Private Firm s Objective Function: ( qc, ) ( PQ ( ) c ) q F F F F ( k [,1]) 8
Foreign Firm s Output Home Firm s Reaction Function k k Home Firm s Product Foreign Firm s Product t E k E t E Foreign Firm s Reaction Function Home Firm s Output 9
Tariff Incentives for Welfare Maximization: W P qf 1 ( PcH) q t q t t t t H H F Terms of Trade Effect Optimal Tariff: t N Resource Allocation Effect Tariff Revenue Effect k total output Market Price Resource Allocation Effect t N 1
1 st stage 2 nd stage Home Government Home Semipublic Firm Owner tariff Contract Foreign Firm Owner Manager Manager 3 rd stage output Home Market 11
Manager s Incentive Contract Function: M (1 ) Pq Pc q i i i i i i i i ( i [,1]) M i Pci i qi Define (1 ) c i i i as Owner s Subsidy Equivalent as if Owner Subsidizes the Firm When i Firms Behave More Aggressively when Privatized 12
FOC for Home Firm s Payoff Maximization: UH UH F qh q qh qf H FOC for Foreign Firm s Profit Maximization: F F H qf q qf qh F FOC as a Stackelberg Leader Effects of Managerial Delegation When k=: Prisoner s Dilemma ---Basu(1995) When k=1: Higher Welfare---Barros(1995) 13
FOC for Home Firm s Payoff Maximization: UH UH F qh q qh qf H FOC for Foreign Firm s Profit Maximization: F F H qf q qf qh F k Home Owner s Subsidy Equivalent Foreign Owner s Subsidy Equivalent 14
Foreign Owner s Subsidy Equivalent Home Owner s Reaction Function t e H dependent on k t if k>1/4 t if k<1/4 k e e e F H F,, t k k t E t 2 E k E Foreign Owner s Reaction Function t1 E Home Owner s Subsidy Equivalent 15
Tariff Incentives for Welfare Maximization: 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 G t When k is small G t When k is large 16
Home Semipublic Firm Foreign Firm 1 st stage Owner Contract Owner Manager Manager 2 nd stage Home Government tariff 3 rd stage output Home Market 17
Optimal Tariff Decision: e H t e F t When Government Moves First (Case G) Complement if k<1/3 Tariff Policy Managerial Delegation Substitute if k>1/3 When Owners Move First (Case O) Substitute Tariff Policy Managerial Delegation 18
FOC for Home Firm: e e e e UH UH qh UH qf UH t q q t H H H F H H O H Excess Competition Effect FOC for Foreign Firm: Rent Shifting Effect Tariff Imposition Effect e e e e F F qf F qh F t q q t F F F H F F O F 19
Summary(1): Import Tariff c a 8 A(k) C(k) 6 4 2 B(k) t O t N t G t O t G t N t G t O t N.5.2.4.6.8 1. k 2 t N t O t G 4 6 2
Summary(2): Owner s Subsidy Equivalent c a.65.6.55.5.45.4 Σ H G Σ H O Σ H G Σ H O.2.4.6.8 1. k 21
c Summary(3): Home Output a F(k).8.6.5.4 E(k).2 G(k) q H O qh N q H G q H O qh G q H N q H G qh O q H N N q H O G qh q H N q H G O qh q H G q H N O qh q H.2.4.6.8 1. k 22
Summary(4): Foreign Output c a I(k) 1. q F G >q F O q F N.5 q F G >q F N q F O H(k) J(k).2.4.6.8 1. q F N >q F G q F O k.5 q F N >q F O q F G 1. 23
Summary(5): Home Profit Π H.2.15 Π H N Π H O.1 Π H G.5.2.4.6.8 1. k 24
Summary(6): Foreign Profit.12 Π F Π F N.1 Π F O.8.6 Π F G.4.2.34.2.4.6.8 1. 25 k
Summary(7): Home Welfare.5 W H.48.46 W H G.44.42 W H O.4 W H N.2.4.6.8 1. 26 k
Some Other Results Foreign Owner s Subsidization Incentive is Dependent on the Move Orders For Home Owner independent of k O N G H H H For Foreign Owner Managerial Delegation always yields Lower Profit For Home Government First Mover Payoff is Much Larger than others 27