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Bailouts in a common market: a strategic approach

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  • Glowicka, Ela

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.

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  • Glowicka, Ela, 2005. "Bailouts in a common market: a strategic approach," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 177, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    • Handle: RePEc:trf:wpaper:177
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    1. Glowicka, Ela, 2006. "Effectiveness of bailouts in the EU," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 176, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    2. European Commission, Directorate-General for Competition (Brussels) (ed.), 2016. "Ex-post evaluation of the impact of restructuring aid decisions on the viability of aided (non-financial) firms: Final report," ZEW Expertises, ZEW - Leibniz Centre for European Economic Research, number 130514.

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    More about this item

    Keywords

    subsidies; asymmetric oligopoly; exit; European Union;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods

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