CONSUMER DISCRIMINATION, DUOPOLY, AND BLACK FIRM ENTRY - THE WELFARE EFFECT OF SUBSIDIES

Consumer discrimination, to the extent that it lowers expected profit for black owned firms, discourages the entry of new black firms. From a social welfare perspective, consumer discrimination may be welfare r educing, since market output is lower than otherwise. If so, a policy intervention that subsidizes new black firms may improve social welfar e. This article presents a simple model of duopoly where consumer disc rimination exists with uncertainty, and the only cost of production is a ''loss of sales'' cost. Given the Nash equilibrium, in which a blac k and white firm must select a price to charge, conditions are derived for which a profit subsidy to a new black firm increases, decreases, or has no effect on social welfare.