Cooperation among competitors: A comparison of cost-sharing mechanisms

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9 Citazioni (Scopus)

Abstract

In this paper, we investigate the consequences of using outcome-based versus ex ante-based cost-sharing mechanisms in terms of competing firms' profitability and total welfare. We consider two firms making a joint expenditure, which can positively affect firms' demand and/or unit operating costs, while competing in the final market by setting either price or quantity. We compare two outcome-based cost-sharing mechanisms, i.e., Quantity Proportional (QP) and Total Margin proportional (TM), with the more competitive Fixed Share (FS) mechanism where cost-sharing is set up on an ex ante basis. We show that outcome-based mechanisms, and even a fully collusive behavior induced by the optimal cost-sharing mechanism, might actually enhance total welfare as compared with the more competitive FS mechanism. We also find that, although the FS mechanism is never more preferable than the TM mechanism, it can lead to higher profits than the QP mechanism when competition is mild. These results can support firms cooperating with competitors in the choice of the cost-sharing mechanism as well as provide important implications to policy makers.
Lingua originaleEnglish
pagine (da-a)172-182
Numero di pagine11
RivistaInternational Journal of Production Economics
Volume180
Stato di pubblicazionePublished - 2016

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Costs
Profitability
Operating costs
Cost sharing
Competitors
Margin

All Science Journal Classification (ASJC) codes

  • Business, Management and Accounting(all)
  • Economics and Econometrics
  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering

Cita questo

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title = "Cooperation among competitors: A comparison of cost-sharing mechanisms",
abstract = "In this paper, we investigate the consequences of using outcome-based versus ex ante-based cost-sharing mechanisms in terms of competing firms' profitability and total welfare. We consider two firms making a joint expenditure, which can positively affect firms' demand and/or unit operating costs, while competing in the final market by setting either price or quantity. We compare two outcome-based cost-sharing mechanisms, i.e., Quantity Proportional (QP) and Total Margin proportional (TM), with the more competitive Fixed Share (FS) mechanism where cost-sharing is set up on an ex ante basis. We show that outcome-based mechanisms, and even a fully collusive behavior induced by the optimal cost-sharing mechanism, might actually enhance total welfare as compared with the more competitive FS mechanism. We also find that, although the FS mechanism is never more preferable than the TM mechanism, it can lead to higher profits than the QP mechanism when competition is mild. These results can support firms cooperating with competitors in the choice of the cost-sharing mechanism as well as provide important implications to policy makers.",
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author = "Giovanni Perrone and Paolo Roma",
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journal = "International Journal of Production Economics",
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T1 - Cooperation among competitors: A comparison of cost-sharing mechanisms

AU - Perrone, Giovanni

AU - Roma, Paolo

PY - 2016

Y1 - 2016

N2 - In this paper, we investigate the consequences of using outcome-based versus ex ante-based cost-sharing mechanisms in terms of competing firms' profitability and total welfare. We consider two firms making a joint expenditure, which can positively affect firms' demand and/or unit operating costs, while competing in the final market by setting either price or quantity. We compare two outcome-based cost-sharing mechanisms, i.e., Quantity Proportional (QP) and Total Margin proportional (TM), with the more competitive Fixed Share (FS) mechanism where cost-sharing is set up on an ex ante basis. We show that outcome-based mechanisms, and even a fully collusive behavior induced by the optimal cost-sharing mechanism, might actually enhance total welfare as compared with the more competitive FS mechanism. We also find that, although the FS mechanism is never more preferable than the TM mechanism, it can lead to higher profits than the QP mechanism when competition is mild. These results can support firms cooperating with competitors in the choice of the cost-sharing mechanism as well as provide important implications to policy makers.

AB - In this paper, we investigate the consequences of using outcome-based versus ex ante-based cost-sharing mechanisms in terms of competing firms' profitability and total welfare. We consider two firms making a joint expenditure, which can positively affect firms' demand and/or unit operating costs, while competing in the final market by setting either price or quantity. We compare two outcome-based cost-sharing mechanisms, i.e., Quantity Proportional (QP) and Total Margin proportional (TM), with the more competitive Fixed Share (FS) mechanism where cost-sharing is set up on an ex ante basis. We show that outcome-based mechanisms, and even a fully collusive behavior induced by the optimal cost-sharing mechanism, might actually enhance total welfare as compared with the more competitive FS mechanism. We also find that, although the FS mechanism is never more preferable than the TM mechanism, it can lead to higher profits than the QP mechanism when competition is mild. These results can support firms cooperating with competitors in the choice of the cost-sharing mechanism as well as provide important implications to policy makers.

KW - Competition

KW - Cooperation

KW - Cost-sharing mechanisms

KW - Decision making

KW - Game theory.

UR - http://hdl.handle.net/10447/204912

M3 - Article

VL - 180

SP - 172

EP - 182

JO - International Journal of Production Economics

JF - International Journal of Production Economics

SN - 0925-5273

ER -