Endogenous competition with an integrated public utility firm under an output subsidy policy

Lili Xu and Sang-Ho Lee

Utilities Policy, 2024, vol. 87, issue C

Abstract: In this study, we consider a mixed downstream market wherein a vertically integrated public utility firm competes with a private firm that purchases inputs from an upstream firm under output subsidies. We construct an endogenous competition mode game and find that not only do pure Cournot and Bertrand competitions appear as equilibria, but a hybrid Bertrand-Cournot competition can also materialize depending on the subsidy rate. However, Cournot competition appears as a unique equilibrium in the private market irrespective of subsidy rate. We demonstrate that privatization, accompanied by subsidization that shifts firms’ coordination from a hybrid Bertrand-Cournot competition to a Cournot competition, could improve welfare.

Keywords: Endogenous competition mode game; Mixed downstream market; Output subsidy; Privatization policy; Vertically integrated public utility (search for similar items in EconPapers)
JEL-codes: D43 L22 L33 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:juipol:v:87:y:2024:i:c:s0957178724000134

DOI: 10.1016/j.jup.2024.101720

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