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On Public Inefficiencies in a Mixed Duopoly

  • 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)

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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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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