There is a free lunch after all

✍ Scribed by Chun-Hsiung Liao; Yair Tauman

• Publisher: Elsevier Science
• Year: 2004
• Tongue: English
• Weight: 113 KB
• Volume: 48
• Category: Article
• ISSN: 0165-4896
• DOI: 10.1016/j.mathsocsci.2004.02.002

✦ Synopsis

This paper shows that there is a simple way for a financial institution to make a positive profit, free of risk, under imperfect competition. The institution plays a very limited role. It offers firms in the industry a per-unit subsidy in return for a predetermined upfront fee. It neither produces its own output nor sells the products of the subsidized firms. In equilibrium, firms accept the offer although they end up with lower net profits. The institution makes a positive profit as it collects upfront fees which exceed its subsidy payments. The resulting outcome in a Cournot industry is welfare improvement.