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Mixed duopoly, privatization and the shadow cost of public funds

Author

Listed:
  • CAPUANO, Carlo

    (University of Naples Federico II)

  • DE FEO, Giuseppe

    (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))

Abstract

The purpose of this paper is to investigate the effect of privatization in a mixed duopoly, where a private firm competes in quantities with a welfare-maximizing public firm. We consider two inefficiencies of the public sector: a possible cost inefficiency, and an allocative inefficiency due to the distortionary effect of taxation (shadow cost of public funds). Furthermore, we analyze the effect of privatization on the timing of competition by endogenizing the determination of simultaneous (Nash-Cournot) versus sequential (Stackelberg) games using the model developed by Hamilton and Slutsky (1990). The latter is especially relevant for the analysis of privatization, given that results and policy prescription emerged in the literature crucially rely on the type of competition assumed. We show that privatization has generally the effect of shifting from Stackelberg to Cournot equilibrium and that, absent efficiency gains privatization never increases welfare. Moreover, even when large efficiency gains are realized, an inefficient public firm may be preferred.

Suggested Citation

  • CAPUANO, Carlo & DE FEO, Giuseppe, 2008. "Mixed duopoly, privatization and the shadow cost of public funds," CORE Discussion Papers 2008019, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2008019
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    File URL: http://www.uclouvain.be/cps/ucl/doc/core/documents/coredp2008_19.pdf
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    Cited by:

    1. Goering, Gregory E. & Sarangi, Sudipta, 2012. "Durable goods produced by state owned enterprises," Economic Modelling, Elsevier, vol. 29(3), pages 893-899.
    2. Choi, Kangsik, 2009. "Government's Preference and Timing of Endogenous Wage Setting: Perspectives on Privatization and Mixed Duopoly," MPRA Paper 17221, University Library of Munich, Germany.
    3. Choi, Kangsik, 2010. "Strategic Budget Constraints of Public Firm under Bertrand Competition of Unionized Mixed Duopoly," MPRA Paper 19969, University Library of Munich, Germany.

    More about this item

    Keywords

    mixed oligopoly; privatization; endogenous timing; distortionary taxes.;

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L32 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Enterprises; Public-Private Enterprises
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out

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