Bailouts in a common market: a strategic approach

Glowicka, Ela (October 2005): Bailouts in a common market: a strategic approach. SFB/TR 15 Discussion Paper No. 177

Abstract

Governments in the EU grant Rescue and Restructure Subsidies to bail out ailing firms. In an international asymmetric Cournot duopoly we study effects of such subsidies on market structure and welfare. We adopt a common market setting, where consumers from the two countries form one market. We show that the subsidy is positive also when it fails to prevent the exit. The reason is a strategic effect, which forces the more efficient firm to make additional cost-reducing effort. When the exit is prevented, allocative and productive efficiencies are lower and the only gaining player is the rescued firm.

• Item Type: Paper
• Keywords: subsidies, asymmetric oligopoly, exit, European Union
• Faculties: Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems; Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > C5 - Wettbewerbspolitik als Steuerung von Wettbewerbsprozessen
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: F13, L13, L52
• Language: English