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Endogenous Cost Differentials between Public and Private Enterprises: A Mixed Duopoly Approach

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  • Toshihiro Matsumura
  • Noriaki Matsushima

Abstract

We investigate a mixed duopoly, where a state-owned welfare-maximizing public firm competes against a profit-maximizing private firm. We use a Hotelling-type spatial model which represents product differentiation. We endogenize production costs by introducing cost-reducing activities. We show that the private firm's cost becomes lower than the public firm's because the private firm engages in excessive strategic cost-reducing activities. Even though each firm's cost is heterogeneous, the locations of the firms are socially efficient, given the cost differentials. Privatization of the public firm would improve welfare because it would mitigate the loss arising from excessive cost-reducing investments. Copyright (c) The London School of Economics and Political Science 2004.

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  • Toshihiro Matsumura & Noriaki Matsushima, 2004. "Endogenous Cost Differentials between Public and Private Enterprises: A Mixed Duopoly Approach," Economica, London School of Economics and Political Science, vol. 71(284), pages 671-688, November.
  • Handle: RePEc:bla:econom:v:71:y:2004:i:284:p:671-688
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