Abstract
Chapter 5 discusses some specific issues and provide a survey of some recent results pertaining to the problems of market quality in emerging economies like India. We show how in some specific cases, insights from the theoretical results on oligopoly and auctions can be used to improve market quality. We also pose some research problems that may be taken up. We select the following themes: (i) Delegation in scoring auction (ii) Restricted entry and market quality (iii) Public Sector Leadership (iv) Designing credit institutions and (v) Corruption and Union Leadership.
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Notes
- 1.
It may be noted that we do not pretend to cover the entire range of issues related to market quality and do not necessarily regard the topics that we exclude as unimportant. Our selection inevitably reflects our own preferences and research interests.
- 2.
For some details see \(<<\) http://ficci.in/Sedocument/20254/FICCI-EY-Report-Bribery-corruption.pdf \(>>\).
- 3.
In an emerging economy like India this is possible in the following ways: (i) in the parliament or state assembly this region is represented by the politician who has been elected. (ii) this infrastructure project falls under the purview of a ministry which is headed by this elected politician.
- 4.
The representative voter’s utility is strictly increasing in the quality of the public infrastructure project and strictly decreasing in its price. Since quality of the infrastructure directly affects the quality of life of the voter in this region, his utility is increasing in quality. Such a project is typically financed by taxpayer’s money and since the representative voter is a taxpayer, he cares for the price of the project.
- 5.
Typically, first-score autions are used in real life. Note that since the scoring rule is quasilinear, the result on expected score equivalence holds and consequently, second-score auctions would also give us the same theoretical results.
- 6.
Note that the politician also keeps in mind possibilities of his re-election from the same constituency. That’s why his utility function puts a positive weight on voter’s utility as well. Note that since \(0\le \beta <\frac{1}{1+\alpha }\) the politician’s utility, \(U\left( .\right) \), is strictly decreasing in p and strictly increasing in q. This means that the politician’s utility is sort of aligned with the representative voter’s utility. Typically, the politician comes from the same region as the representative voter and has similar preferences. The model in Dastidar and Mukherjee (2014) captures this aspect also.
- 7.
It may be noted that in an optimal revelation mechanism the firm with the lowest \(\theta \) is selected as the winner and the winning firm is induced to choose quality \(q_{0}\left( .\right) \). In the optimal mechanism quality is distorted downwards to limit the information rents accruing to relatively efficient firms. A Pareto efficient level of quality maximises \(\left( 1-\beta \right) u\left( q\right) -c\left( q,\theta \right) \). The definition of \(q_{0}\) ensures that it is strictly less than the Pareto efficient level of quality. See Che (1993) for details.
- 8.
As noted before, incumbent firms in a developed economy use lobbying to create entry barriers. For example, in 2016, lobbying by the incumbent hotel industry in Japan has successfully created entry barriers for the new entrant, Airbnb. (for details see Nakamura, Y. and M. Takahashi in Bloomberg, February 19, 2016). This is clearly a case where lobbying by the incumbent industry has successfully created entry barriers for the new entrant, Airbnb.
- 9.
Sometimes politicians themselves or their family members are among the largest shareholders of such companies. The “Competition Commission of India” in its several annual reports have documented unfair practises by large Indian firms. All such reports are available on the website \(<<\) http://www.cci.gov.in/ \(>>\).
- 10.
There are a couple of papers that study the endogenous determination of market quality (although in a much looser sense). Dei (2011) analyses the dynamic development of a high quality labor market where unskilled and skilled workers are properly distinguished. The paper by Furukawa and Yano (2014) studies market quality by focusing on fairness in handling intellectual properties.
- 11.
Maximum possible total fairness (i.e. \(\phi b=0\)) will be there when the governance is perfect. Some of the Scandinavian countries (for example, Denmark) possibly have a very high fairness index. However, when the governance is relatively poor (\(\phi b\) very low), which is very likely in emerging economies like India, Pakistan, Bangladesh etc., the fairness index is likely to be high negative. In Chap. 3 we took a similar approach.
- 12.
The reasons spelt our by Dastidar and Yano (2017) for asymmetric costs are as follows. (i) The potential entrant may be a foreign firm with a superior (low cost) technology. (ii) Typically in an emerging economy the potential entrant is often a small local firm. The incumbent firm is typically very large, has a large bureaucracy and it draws labour from the formal sector, where wages are higher as compared to the informal sector. This pushes up the per unit cost of the incumbent. On the other hand, the small local firm has access to the informal labour market and consequently it can pay lower wages.
- 13.
Note that \(\alpha \) is private information to the entrant but the incumbent’s cost are common knowledge, The reasons could be as follows. (i) If the potential entrant is a foreign firm with a superior technology the incumbent may not be aware of the extent of the technological superiority. (ii) When the potential entrant is a small local firm then also the incumbent may face incomplete information. The small local firm has possible access to the informal labour market. Such a labour market is completely unregulated and wages are often decided by informal bargaining. Consequently, wages are known only to the small local firm and the labourer. (iii) Since the incumbent is an established entity, it is required (by law) to purchase inputs and hire labour from the formal sector where prices and wage rates are typically known. As such, its costs are generally known to everybody.
- 14.
See Vives (1999) for a succinct summary of the classic results around this point. Alipranti et al. (2014) provides some recent results. Also, see Dastidar (1997 and 2015a).
- 15.
For partial privatization see Bos (1986), Fershtman (1990), Matsumura (1998) etc.
- 16.
Dastidar (2011a and 2011b) have some related results on Bertrand equilibrum with private firms.
- 17.
The intuition behind this result is the following. A unilateral price reduction from a price charged by the rival firm means that the price cutting firm has to supply the entire demand (given our Assumption 3). Since costs are strictly convex this leads to a disproportionate increase in cost. In the equilibrium range of prices a firm refrains from price reduction because the increase in additional revenue (because of larger sales) is less than the increase in costs. This is the reason for the existence of multiple equilibria and also why prices above marginal costs can be sustained in a Nash equilibrium which is not possible under constant marginal costs due to the well known Bertrand paradox.
- 18.
The paper by Dastidar and Mukherjee (2014) discussed in this chapter analyzes some aspects of this phenomenon.
- 19.
Note that the new moneylenders could not previously enter the informal credit market because of their high opportunity costs of credit vis-à -vis the preexisting moneylender. Now when vertical linkage between formal and credit markets is forged, each of them receives a given amount of formal credit at the subsidized interest rate which enables them to make some positive profits from money-lending but cannot set their own interest rates individually or collectively. This is because if any one charges a lower interest rate than what the dominant moneylender charges, he is only going to suffer because of his limited amount of funds. On the contrary, if he charges a higher interest rate vis-à-vis the rate fixed by the preexisting moneylender, no borrower would borrow from him and hence the assumption that the new money lenders are like price followers.
- 20.
This result is different from that of Chaudhuri and Dastidar (2011).
- 21.
Development economists have often expressed concerns regarding the efficacy of the policy of forging a vertical linkage between the formal and informal credit markets in achieving its primary objective to enhance competition and improve the borrowing terms faced by the small and marginal farmers. It has been shown in the literature that such a policy may indeed be counterproductive under asymmetric information among informal sector lenders. In this context, Chaudhuri and Dastidar (2014a) analyse some of the issues that have not been adequately examined earlier.
- 22.
See the classic paper on corruption by Shleifer and Vishny (1993). See Bardhan (1997) for a review of issues related to corruption in developing nations. The edited book by Mishra (2005) consist of a very interesting set of articles on corruption. Basu (2011) provides some interesting ideas on tackling corruption in India.
- 23.
Note that the theory of “efficiency wage” postulates that the efficiency of a worker is positively related to both the wage and unemployment rate in the economy.
- 24.
There is no unemployment of unskilled labour in the economy (as the labour market is competitive). The formal sector is characterised by unemployment (the labour market for this segment is not competitive). This scenario is common in a country like India. Even though in a developing economy like India there is dichotomy in the unskilled labour market as well and formal-informal division, more than 70% of the unskilled workforce is employed in the informal sector. Typically, the unskilled workers flock to the informal sector and earn a competitive wage. But, here we concentrate only on the skilled labour market and assume away the formal segment of the unskilled labour market and hence unskilled unemployment. The skilled workers, on the other hand, operate mainly in the formal sector where formal labour laws are applicable. As such, the formal sector is characterised by unemployment.
- 25.
The paper by Chaudhuri and Dastidar (2016) has a similar approach and shows that presence of a corrupt union leader often contribute to perpetuation of low wages among workers, especially in emerging economies. However, Chaudhuri and Dastidar (2016) do not consider the effects of ‘efficiency wage’.
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Dastidar, K.G. (2017). Some Specific Market Quality Issues in Emerging Economies. In: Oligopoly, Auctions and Market Quality. Economics, Law, and Institutions in Asia Pacific. Springer, Tokyo. https://doi.org/10.1007/978-4-431-55396-0_5
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