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Quality and Competition between Public and Private Firms

Listed author(s):
  • Liisa Laine

    ()

    (University of Jyvaskyla)

  • Ching-to Albert Ma

    ()

    (Boston University)

We study a multi-stage, quality-price game between a public firm and a private firm. The market consists of a set of consumers who have di§erent quality valuations. A public firm aims to maximize social surplus, whereas the private firm maximizes profit. In the first stage, both firms simultaneously choose qualities. In the second stage, both firms simultaneously choose prices. Consumers' qualty valuations follow a general distribution. Firms' unit production cost is a an increasing and convex function of quality. There are multiple equilibria. In some, the public firm chooses a low quality, and the private firm chooses a high quality. In others, the opposite is true. We characterize subgame-perfect equilibria, and provide conditions on consumer valuation distribution for first-best equilibrium qualities. Various policy implications are drawn.

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Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number wp2016-006.

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Date of creation: Mar 2016
Handle: RePEc:bos:wpaper:wp2016-006
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