We also find that firm attributes and past behavior significantly affect capacity choices. 2 Public firm is usually used for this type of firm in the field of economics. In contrast to mixed oligopoly theory, all firms' capacities are not necessarily used for production in the second stage.
Fourth, both social and domestic surpluses increase in the case of a production subsidy, but decrease in the case of a capacity subsidy. Fifth, the firm's past characteristics and behavior significantly influence capacity choices and pricing. As explained in the next subsection, one of the two subjects plays the role of a private company, while the other plays the role of a state-owned company in the game of quantity pricing.
In the experiment, a table of quantities and prices reflecting the demand situation (1) is distributed at the beginning of the experiment (see Figure 1). Finally, the initial incentive level of the SOE to increase production/sales in SS9 is different from that in the other treatments. On the other hand, the increase in production subsidy in SS9 is the same as in SS3.
However, at the end of these sessions, subjects were told that the exchange rate had been changed to “6 trial dollars.
Results
- Market Variables
- Variables for Private Firms and SOEs
- Surpluses
- Individual Behavior
- Additional Treatments
In the case of a production subsidy, capacity, sales and spare capacity increase, while prices and profits decrease. An interesting point is that this change in the second stage (pricing) causes private companies to increase their capacity in the first stage. In the case of a production subsidy, the changes in capacity, price, sales and profit correspond to those that apply to private companies.
With a focus on averages, both social and domestic profits increase with production subsidies, while they fall with capacity subsidies. Because the average prices of both private firms and state-owned firms fall in response to an increase in production support in the former case, consumer surplus increases. Both social and domestic profits increase with production subsidies and fall with capacity subsidies.
In this case, according to Tables 3a and 4a, domestic surpluses decrease in the case of a production subsidy and increase in the case of a capacity subsidy. Pre-partner-capa (partner_capa_t-1) is the capacity chosen by the partner (the rival firm) in the previous round, and pre-partner-price (partner_price_t-1) is the price chosen by the partner in the previous round. Pre-idle (idle_t-1) is the amount of a subject's own idle capacity in the previous round.
In the case of capacity subsidy, the coefficient of prepartner capa is significant and positive. In the case of a production subsidy, the magnitudes of the coefficients are almost the same for both phases. On the other hand, the magnitude of the coefficients for Phase 2 is larger than that for Phase 1 in the case of a capacity subsidy.
The coefficients for pre-partner price in the case of production support are significant and positive in stage 1, implying that conditional cooperation holds. Because the total capacities are increased by production subsidies in phase 2, it is natural that the subjects act uncooperatively. On the other hand, the capacities of the SOEs in phase 1 in SS9 are greater than in the other treatments.
On the other hand, the prices in SS9 are clearly lower than in the other treatments. The profit for both private companies and state-owned companies in SS9 is clearly smaller than for the other treatments, including SS3.
Discussion
However, as we focus on additional treatments, the amount of the subsidy affects the price determinations of both private firms and SOEs. It is likely that the greater the amount of the production subsidy, the greater the amount of idle capacity. Thus, competitive conditions are favorable for SOEs in the second stage, and private firms tend to have larger amounts of idle capacity compared to SOEs.
Therefore, private enterprises expect that competing enterprises (SOEs) will surely increase their capacity due to the increase in the capacity subsidy and reduce their capacity accordingly to avoid drastic reductions in prices and profits due to fierce competition. In the case of a production subsidy, this situation occurs in the second stage, because the production subsidy directly affects the pricing behavior of SOEs. Thus, the difference in the behavior of private firms in the first stage leads to opposite results in the cases of the two types of subsidies.
The first point is that even a small amount of subsidy can drastically affect the variables of both private firms and SOEs. For example, focusing again on the behavior of SOEs in SS3 (Table 4a), the increased subsidy amount in the objective function of SOEs is equivalent to a decrease in marginal cost by 4.29. Moreover, the average sales of private firms also increase, even though the marginal cost of selling is higher after an increase in the SOE output subsidy than before the increase.
However, it is difficult to know the right amount of output/capacity subsidy to apply. Third, the effect of a capacity subsidy is likely to be the opposite of the effect of an output subsidy. If competition for capacity building in the first stage or price competition in the second stage becomes fierce due to increased capacity subsidy, the idle capacities of private firms also increase.
However, the experimental results indicate the opposite situation: the idle capacity of SOEs does not change, and that of private enterprises, on average, decreases significantly. Moreover, as long as the focus is on the average profit, the increased amount for private enterprises is greater than for state-owned enterprises. However, this situation arises because private firms reduce their capacity in response to increases in the expected capacity of state-owned firms.
Conclusion
However, when the amount of subsidy is relatively large, a capacity subsidy is more desirable than a production subsidy because it is less likely that a capacity subsidy will cause drastic price declines.
Absorptive capacity and R&D strategy in mixed duopoly with labor-managed and profit-maximizing firms.
