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On Public Inefficiencies in a Mixed Duopoly

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  • Capuano, Carlo
  • De Feo, Giuseppe

Abstract

The aim of this paper is to investigate the welfare effect of a change in the public firms 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.

Suggested Citation

  • Capuano, Carlo & De Feo, Giuseppe, 2009. "On Public Inefficiencies in a Mixed Duopoly," SIRE Discussion Papers 2009-35, Scottish Institute for Research in Economics (SIRE).
    • Handle: RePEc:edn:sirdps:98
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    More about this item

    Keywords

    Mixed oligopoly; Nash equilibria; Endogenous Timing; Distortionary taxes;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • 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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