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On Public Inefficiencies in a Mixed Duopoly

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  • Carlo Capuano

    ()
    (Department of Economics, University of Naples Federico II, Complesso Universitario di Monte S.Angelo)

  • Giuseppe De Feo

    ()
    (Department of Economics, University of Strathclyde)

Abstract

The aim of this paper is to investigate the welfare effect of a change in the public firm's objective function in oligopoly when the government takes into account the distortionary effect of rising funds by taxation (shadow cost of public funds). We analyze the impact of a shift from welfare- to profit-maximizing behaviour of the public firm on the timing of competition by endogenizing the determination of simultaneous (Nash-Cournot) versus sequential (Stackelberg) games using the game with observable delay proposed by Hamilton and Slutsky (1990). Differently from previous work that assumed the timing of competition, we show that, absent efficiency gains, instructing the public firm to play as a private one never increases welfare. Moreover, even when large efficiency gains result from the shift in public firm's objective, an inefficient public firm that maximizes welfare may be preferred.

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Bibliographic Info

Paper provided by University of Strathclyde Business School, Department of Economics in its series Working Papers with number 0916.

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Length: 26 pages
Date of creation: Jul 2009
Date of revision:
Handle: RePEc:str:wpaper:0916

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Keywords: Mixed oligopoly; Nash equilibria; Endogenous Timing; Distortionary taxes;

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  1. CLAUDE, Denis & HINDRIKS, Jean, 2005. "Strategic privatization and regulation policy in mixed markets," CORE Discussion Papers 2005015, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. CREMER, Helmuth & MARCHAND, Maurice & THISSE, Jacques-François, . "The public firm as an instrument for regulating an oligopolistic market," CORE Discussion Papers RP -832, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Pal, Debashis, 1998. "Endogenous timing in a mixed oligopoly," Economics Letters, Elsevier, vol. 61(2), pages 181-185, November.
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  5. Damme, E.E.C. van & Hurkens, S., 2004. "Endogenous price leadership," Open Access publications from Tilburg University urn:nbn:nl:ui:12-129320, Tilburg University.
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  7. Hamilton, J.H. & Slutsky, S.M., 1988. "Endogenous Timing In Duopoly Games: Stackelberg Or Cournot Equilibria," Papers 88-4, Florida - College of Business Administration.
  8. AMIR, Rabah & STEPANOVA, Anna, 2004. "Second-mover advantage and price leadership in Bertrand duopoly," CORE Discussion Papers 2004037, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. Amir, Rabah & Grilo, Isabel, 1999. "Stackelberg versus Cournot Equilibrium," Games and Economic Behavior, Elsevier, vol. 26(1), pages 1-21, January.
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  13. de Fraja, Giovanni & Delbono, Flavio, 1989. "Alternative Strategies of a Public Enterprise in Oligopoly," Oxford Economic Papers, Oxford University Press, vol. 41(2), pages 302-11, April.
  14. Willner, Johan, 2001. "Ownership, efficiency, and political interference," European Journal of Political Economy, Elsevier, vol. 17(4), pages 723-748, November.
  15. Kandori, M. & Mailath, G.J., 1991. "Learning, Mutation, And Long Run Equilibria In Games," Papers 71, Princeton, Woodrow Wilson School - John M. Olin Program.
  16. Jeffry M. Netter & William L. Megginson, 2001. "From State to Market: A Survey of Empirical Studies on Privatization," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 321-389, June.
  17. John C. Harsanyi & Reinhard Selten, 1988. "A General Theory of Equilibrium Selection in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262582384, December.
  18. Ellison, Glenn, 1993. "Learning, Local Interaction, and Coordination," Econometrica, Econometric Society, vol. 61(5), pages 1047-71, September.
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