Mixed Duopoly, Privatization and Subsidization: Complementary Goods

This paper uses a mixed market model in which a state-owned public firm and a private firm produce complementary goods and reassesses the welfare effects of production subsidies. The paper examines four regimes: mixed and private duopoly, each with and without subsidies. In the regimes without subsidies, a one-shot Cournot-Nash game is considered. In the regimes with subsidies, the following two-stage game is considered: At the first stage the government chooses the subsidy level to maximize social welfare, and at the second stage each firm observes the subsidy and simultaneously chooses its output level. The paper presents the following two main results. First, if production subsidies are used only before privatization, then there is a reduction in social welfare. Second, if production subsidies are used before and after privatization, then social welfare is not changed by privatization. The paper finds that the results are the same as those obtained by White (1996) that examines the welfare effects of production subsidies in a Cournot mixed market with homogeneous goods.