This study experimentally examines the effect of SOE subsidies on capacities, prices, and profits of both a private firm and an SOE under the setting of mixed duopoly. We also examine if this type of subsidy is harmful by investigating the effect on social surplus. To this end, we adopt a two-stage capacity-price decision-making setting. In this setting, subjects choose their capacities simultaneously in the first stage and, then, choose their prices simultaneously in the second stage, during which we consider the factors of both quantity and price competition. To analyze the data I used panel data estimation and Wilcoxon Signed- Rnaks Test.
This paper has two important features. First, we examine two types of subsidies for SOEs: a production/sales subsidy and a capacity subsidy. Second, we carry out several treatments for a production subsidy, with different amounts of per unit production subsidy across treatments.
The main results from personal lab experiments are as follows. First, even a small amount of subsidy can influence the choices of capacities and prices of both types of firms. Second, a production subsidy increases the capacities of both private firms and SOEs and, accordingly, the prices of both types of firms’ products decrease. These changes indicate that quantity competition becomes more severe after a subsidy is provided. With a capacity subsidy, the quantity competition between both types of firms is less severe, the profits of both types of firms increase and, interestingly, the idle capacities of private firms decrease. Third, a capacity subsidy decreases the capacities of private firms while the capacities of SOEs increase. Because the former effect dominates the latter effect, total capacities also decrease. Fourth, both social and domestic surpluses increase in the case of a production subsidy but decrease in the case of a capacity subsidy. Fifth, the firm attributes and behavior in the past significantly influence capacity choices and price setting.