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On Public Inefficiencies in a Mixed Duopoly

Carlo Capuano and Giuseppe De Feo

No 916, Working Papers from University of Strathclyde Business School, Department of Economics

Abstract: 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.

Keywords: Mixed oligopoly; Nash equilibria; Endogenous Timing; Distortionary taxes (search for similar items in EconPapers)
JEL-codes: L1 L13 L32 L33 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2009-07
New Economics Papers: this item is included in nep-com and nep-ind
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Persistent link: https://EconPapers.repec.org/RePEc:str:wpaper:0916

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