Price competition between subsidized organizations

Presentation: Jan Bouckaert (University of Antwerp)

Discussant: Andrei Dubovik (CPB)

Time and location: Tuesday January 18, from 13.00 - 14.00 hours, CPB office, Van Stolkweg 14, The Hague

Language: English

Registration:  Please register by sending an email to seminar@cpb.nl.

Abstract subject: Many firms and organizations compete for customers while at the same time receiving substantial funding from outside sources, such as government subsidies. In this paper, we study the effects of two commonly observed, alternative subsidy systems on the behavior of price-competing firms. Specifically, we compare an open-ended per-unit price subsidy with a closed-ended subsidy, allocated according to the firms' market shares. We find that, holding the total subsidy budget constant, the open-ended subsidy results in fiercer price competition, lower prices, higher output, and lower profits than the closed-ended, market-share based alternative. Second, the open system yields higher overall welfare for relatively modest subsidies and limited substitutability between goods; the closed system performs better at relatively high subsidy levels and when goods are closer substitutes. Third, a market share based subsidy makes collusive behavior between firms much harder. Our results, therefore, suggest a potential trade-off between short-run and long-run objectives: subsidies designed to widen participation may stimulate collusive behavior. These findings may have important policy implications for the design of subsidy systems in, among many others, education and the arts.

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