• Journal of the Korean Operations Research and Management Science Society
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• v.30 no.4
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• pp.71-81
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• 2005

This Paper focuses on the effects of outside competition on an optimal echelon base stock level in a two stage supply chain. This is new in that we have been studying the effects of inside competition within a supply chain up to now. It is known that the optimal echelon base stock level with inside competition within a supply chain is less than the global optimal echelon base stock level without inside competition. This is due to the ' public goods ' nature of inventory. That is, more inventory is better, but one wants the other to invest more, thus resulting in under-investment. However, this phenomenon becomes weaker as outside competition increases. We show that as outside competition becomes stronger, the ' public goods ' effects decrease and the optimal echelon base stock level increases. If the level of competition is sufficiently high, the optimal echelon base stock level goes even higher than the global optimal echelon base stock level. We develop a theoretical model for the analysis and conduct a numerical analysis.

• KDI Journal of Economic Policy
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• v.34 no.2
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• pp.173-204
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• 2012

This study examines the equilibrium investment on the pollution abatement when firms are facing Cournot competition in the output market while the pollution permit market is perfectly competitive. Unlike standard perfect competition scenario, the abatement investment delivers an indirect effect in which it reduces other firms' equilibrium output. Consequently, compared with the socially optimal level, overinvestment arises. I also overview the potential inefficiencies that imperfect market structure induces under the emission trading scheme, presenting policy implications.

• Journal of the Korean Operations Research and Management Science Society
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• v.34 no.2
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• pp.1-13
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• 2009

In this paper, we develop theoretical game models to determine the level of government subsidies for banks to provide policy loans to Innovative SMEs(small and medium sized enterprises) through banks, which otherwise would not finance them for the sake of their own profitability. For this, we compare net cash flows of each bank using different strategies against high risk innovative SMEs. A bank can decide whether to provide them loans or not In each period. Following Kim(2003)'s Infinite horizon model on the soft budget constraint, we introduce a situation in which banks compete against each other for higher net long-term payoffs from their loans to innovative SMEs and non-innovative SMEs. From the models, we show that competition among banks in general leads to a tighter decision against innovative SMEs, as a Nash equilibrium. It is not because the government bank is simply loose in providing loans, but because competition among commercial banks for fewer riskier borrowers results in tighter loan decisions against innovative SMEs. Thus, the competitive market for policy loans to innovative SMEs fails to reach the socially optimal level of loans for innovative SMMs. Commercial banks in the competitive market may require additional supports from the government to make up for the differences in their payoffs to support innovative SMEs, possibly much riskier due to moral hazards and poor discounted cash flows. The monopolistic government bank might also request such supports from the government to fund otherwise unqualified SMEs. We calculate an optimal level of governmental support for banks to guarantee funding such high-risk innovative SMEs over periods without deviating from their optimal Nash equilibrium policies.

• Asia pacific journal of information systems
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• v.23 no.2
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• pp.67-86
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• 2013

This study first provides a stylized model that captures the essential features of the SC (Social Commerce) business and the competition process. The model focuses on the relationship between key decision issues such as marketing inputs and market value. As more SCs join the industry, they are inevitably faced with fierce competition, which may lead to sharp increase in the total marketing and advertising expenditure. This type of competition may lead the industry away from its optimal development path, and at worst, toward a disruption of the entire industry ecosystem. Such being the case, another goal of this study is to examine the possibility that the ToC (Tragedy of the Commons) may occur in the SC industry. We build game models, each of which assumes homogeneity and heterogeneity of SC providers, respectively, and derive explicit equilibrium solutions from both models. Our basic analysis presents Nash equilibria in both models and shows that SC providers are inevitably faced with fierce competition, which may lead to sharp increase in the total marketing expenses. We also compare the game outcomes with one with a hypothetical social planner who determines the total marketing level that optimizes the entire market value. Then, ToC can be defined to describe the situation where the total marketing efforts exceed the socially optimal level of marketing efforts. In both models, we examine the possibility of the ecosystem disruption and specify the conditions under which ToC may occur. However, the chance of avoiding ToC is higher with heterogeneous players than with homogeneous players. To supplement our analytical results, we develop a simulation model which incorporates a market dynamics based on the gap between actual marketing efforts and socially optimal marketing level. Simulation experiments present some lessons and insights which also confirm out findings from equilibrium analysis. For example, heterogeneity in SC providers alleviates the severity of ToC and makes it faster for survivors to escape from the ToC trap. As a result, the degree of industrial concentration tends to increase, which also explains the 'rich-get-richer' phenomenon observed in some empirical studies on the SC industry. Lastly, based on our analytical and experimental results, we come up with some measures to avoid ToC and overcome the shortcomings intrinsic to the current business model. And further discussions provide strategic implications and policy directions to overcome the possible trap of ToC in this ecosystem, and eventually help the industry to sustainably develop itself toward the next level. To name a few examples of policy measures, regulations on the marketing activities so that the overall marketing expenses cannot go beyond the socially optimal level; institutional guidelines and rules to straightening up the distortions in the way that SC providers view the marketing costs (the current marketing costs are underestimated, thereby encouraging SC providers to increase marketing expenditure); and so on.

• KDI Journal of Economic Policy
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• v.13 no.4
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• pp.31-57
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• 1991

Korean firms of all sizes, from virtually every industry, have used and are using the term "excessive competition" to describe the state of their industry and to call for government interventions. Moreover, the Korean government has frequently responded to such calls in various ways favorable to the firms, such as controlling entry, curbing capacity investments, or allowing collusion. Despite such interventions' impact on the overall efficiency on the Korean economy as well as on the wealth distribution among diverse groups of economic agents, the term "excessive competition", the basis for the interventions, has so far escaped rigorous scrutiny. The objective of this paper is to clarify the notion of "excessive competition" and "over-investment" which usually accompanies "excessive competition", and to examine the circumstances under which they might occur. We first survey the cases where the terms are most widely used and proceed to examine those cases to determine if competition is indeed excessive, and if so, what causes "excessive competition". Our main concern deals with the case in which the firms must make investment decisions that involve large sunk costs while facing uncertain demand. In order to analyze this case, we developed a two period model of capacity precommitment and the ensuing competition. In the first period, oligopolistic firms make capacity investments that are irreversible. Demand is uncertain in period 1 and only the distribution is known. Thus, firms must make investment decisions under uncertainty. In the second period, demand is realized, and the firms compete with quantity under realized demand and capacity constraints. In the above setting, we find that there is "no over-investment," en ante, and there is "no excessive competition," ex post. As measured by the information available in period 1, expected return from investment of a firm is non-negative, overall industry capacity does not exceed the socially optimal level, and competition in the second period yields an outcome that gives each operating firm a non-negative second period profit. Thus, neither "excessive competition" nor "over-investment" is possible. This result will generally hold true if there is no externality and if the industry is not a natural monopoly. We also extend this result by examining a model in which the government is an active participant in the game with a well defined preference. Analysis of this model shows that over-investment arises if the government cannot credibly precommit itself to non-intervention when ex post idle capacity occurs, due to socio-political reasons. Firms invest in capacities that exceed socially optimal levels in this case because they correctly expect that the government will find it optimal for itself to intervene once over-investment and ensuing financial problems for the firms occur. Such planned over-investment and ensuing government intervention are the generic problems under the current system. These problems are expected to be repeated in many industries in years to come, causing a significant loss of welfare in the long run. As a remedy to this problem, we recommend a non-intervention policy by the government which creates and utilizes uncertainty. Based upon an argument which is essentially the same as that of Kreps and Wilson in the context of a chain-store game, we show that maintaining a consistent non-intervention policy will deter a planned over-investment by firms in the long run. We believe that the results obtained in this paper has a direct bearing on the public policies relating to many industries including the petrochemical industry that is currently in the center of heated debates.

• Environmental and Resource Economics Review
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• v.29 no.1
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• pp.47-89
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• 2020

We introduce a simple theoretical model to analyze the welfare impact of a competition policy in the natural gas market in South Korea. An incumbent monopolistic firm currently owns essential facilities, but the competition policy mandates that the firm provide open access to any entrant firm, charging an access fee. When no regulation is imposed on the fee pricing, this policy increases social welfare as well as the profit of the incumbent firm. When the pricing is regulated, however, social welfare depends on whether there is information asymmetry between the government and the firm regarding the operating cost of the facilities. If the government has complete information, social welfare can be maximized by choosing the optimal prices. Otherwise, the government has to set the prices based on the information that the firm delivers. We formulate a Bayesian game to analyze this case and identify a set of perfect Bayesian equilibria to compare social welfare.

• Environmental and Resource Economics Review
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• v.21 no.3
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• pp.627-681
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• 2012

This paper starts with a model of monopolistic competition and endogenous growth, and it adds pollution as an input to production. Then I adopt environmental quality as a renewable resource used in production. I show that increasing returns due to specialization of clean activities as inputs can help lead to sustainable growth with no harm to environmental quality. I also compare and evaluate alternative policy combinations (i.e. taxes +subsidies) that correct two distortions from pollution and monopolistic competition. Finally, I find that, if the productivity of environment in final good production is not sufficiently enough, the number of clean goods tends to increase with more environmental concerns.

• KDI Journal of Economic Policy
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• v.33 no.2
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• pp.81-110
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• 2011

Credit rating agencies(CRAs) are accused of failing to provide accurate and fair credit ratings and hence being responsible for the crisis. This paper tries to add on to the literature on credit rating reform through examining the CRAs in a model where rating quality is unobservable. We show that unobservability of rating effort results in the sub-optimal level of quality. Then the paper extends the model to incorporate ancillary services, competition and reputation. We show that ancillary services worsen the conflict of interests of the CRAs and that competition and reputation may not be strong enough to discipline the CRAs. Hence regulatory oversight and imposition of liability may be necessary in order to increase the accuracy of ratings.

• Journal of Distribution Research
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• v.5 no.2
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• pp.91-105
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• 2001

Wholesale club is one of the fastest expanding retailer formats. Given its key features such as limited assortment and no promotion policy, the current paper provides a theory on why the wholesale clubs charge their members fixed annual fees. In a competitive setting with supermarkets, the proposed model demonstrates that the membership fee is the optimal reaction of wholesale clubs to supermarkets" sales promotion. More specifically, the positive amount of annual fee is only justified under the condition that there exists consumer heterogeneity in consumption rate and when the supermarket exercises price promotion on the product that the wholesale club carries. This paper describes the competition in a stylized fashion and derives the optimal membership fee under a scenario where retail promotion is present. This study is valuable in that it offers a different explanation on wholesale club membership fee than conventional wisdoms such as cost sharing and that it provides insights to the managers who consider no-fee format.

• IE interfaces
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• v.22 no.4
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• pp.368-375
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• 2009

This paper considers a two-stage supply system consisting of two make-to-stock facilities. The facility in the first stage produces a single type of component in anticipation of future demands from the market and the end item production while the facility in the second stage produces the end item in anticipation of future demands from the OEM customers. The facility in the first stage has the option of to accept or reject each incoming demand from the market. In this paper, we address the problem of how to control the exogenous component demand and how to manage the production of the end item and the component so as to maximize the system's profit subject to the system costs. In this paper, we present a heuristic policy that is the base-stock production policy combined with a linear switching curve for component demand control. Numerical study is implemented under different operating conditions of the system and it shows that the performance of the heuristic is very promising compared to that of the optimal policy for the Markov model.