Our concern is about a firm-specific industrial policy. When R&D subsidies or taxes are differentiated among firms, the question arises which firms in an industry should receive such support. We analyse a situation where firms differ in their R&D technologies in two distinct ways: they differ both in the costs of performing R&D activities and in the output obtained from such activities. The introduction of several domestic firms creates a corrective motive for government intervention with the firms' R&D activities in addition to Spencer and Brander's strategic motive. We find that the optimal firm-specific industrial policy is affected differently by the two sources of firm heterogeneity. Moreover, a change in a firm's R&D productivity has an ambiguous effect on the optimal policy towards the firm.

Industrial policy and firm heterogeneity

I revisit endogenous timing in a quantity-setting duopoly game. In the basic model, I show that given strong heterogeneity in consumers willingness to pay ( WTP ) and a moderately small consumer segment with low WTP , sequential moving outcomes can appear in equilibrium with the follower enjoying second-mover advantage. Owing to consumer heterogeneity in WTP , there is a local property that a firm's aggressive behaviour may lead to a competitor responding more aggressively. Hence, the sequential moves can restrict firms total outputs to avoid a price collapse, and result in firms strategic choices that Pareto dominate those under the simultaneous move. I further generalize my results and show that although firms compete in quantity, under some conditions of the demand function, features of strategic complements can appear.

Firms’ timing of production with heterogeneous consumers

The LeChatelier-Samuelson principle ("the principle") states that as a reaction to a shock, an agent's short-run adjustment of an action is smaller than the long-run adjustment of that action when the other related actions can also be adjusted. We extend the principle to strategic environments and to shocks that affect more than one action directly. We define long run as an adjustment that also includes the affected player adjusting its other actions and other players adjusting their strategies. We show that the principle holds for 1) supermodular games (strategic complements), 2) submodular games (strategic substitutes) for shocks that affect only one player's action directly and when the players' payoffs depend only on their own strategies and the sum of the rivals' strategies (for example, homogeneous Cournot oligopoly). We also provide other sufficient conditions for the principle to hold in games of strategic substitutes. Our results imply that when the principle holds a multiproduct oligopoly might have lower cost pass-through in the short run than in the long run. Hence, we argue that the principle might explain the empirical findings of overshifting of cost and unit tax by multiproduct firms.

/pdf/lechatelier-samuelson-principle-in-games-and-pass-through-of-3gg2jk64qa.pdf

LeChatelier-Samuelson Principle in Games and Pass-Through of Shocks

https://www.econstor.eu/bitstream/10419/149864/1/877677816.pdf

LeChatelier-Samuelson principle in games and pass-through of shocks

This paper analyzes games with both strategic substitutes and strategic complements. Such games may behave differently from either games with strategic complements or games with strategic substitutes. In such games, equilibria do not decrease as the parameter increases. Moreover, natural conditions are presented to guarantee that an increase in the parameter leads to an increase in the equilibrium: in other words, conditions to guarantee monotone comparative statics. These conditions are based on intuitive tradeoffs between direct parameter effects and indirect strategic effects. These conditions are needed only for players with strategic substitutes; no conditions are imposed on players with strategic complements. Several examples highlight the results.

/pdf/monotone-comparative-statics-in-games-with-both-strategic-1sp5orlqlj.pdf

Lawrence Ks

Papers

Monotone Comparative Statics in Games with both Strategic Complements and Strategic Substitutes