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Informal input sector and its impact on output market competitiveness

Author

Listed:
  • Prasun Bhattacharjee

    (East Tennessee State University)

  • Biswajit Mandal

    (Visva-Bharati University)

  • Ravi Radhakrishnan

    (Centre College)

Abstract

This paper investigates the nature of output market conduct that arises when firms have the opportunity of sourcing input from the informal sector. We assume a duopoly setup where two firms produce horizontally differentiated final goods. Firms have access to a formal and an informal sector to procure input. The formal sector is regulated and has government recognized settlements, while the informal sector is unregulated. Procuring inputs from the informal sector leads to lower cost of production for the final good, but the incomplete nature of contracts in this sector involves additional costs. Given the probability of contract defection in the informal sector, we analyse various output market equilibrium results in the presence of the informal input suppliers and compare these outcomes with standard models of Bertrand competition and monopolistic coalition.

Suggested Citation

  • Prasun Bhattacharjee & Biswajit Mandal & Ravi Radhakrishnan, 2022. "Informal input sector and its impact on output market competitiveness," Indian Economic Review, Springer, vol. 57(2), pages 553-564, December.
    • Handle: RePEc:spr:inecre:v:57:y:2022:i:2:d:10.1007_s41775-022-00146-9
    DOI: 10.1007/s41775-022-00146-9
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    More about this item

    Keywords

    Informality; Bertrand model; Collusion; Contract incompleteness; Monitoring cost;
    All these keywords.

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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