Would Excess Capacity in Public Firms Be Socially Optimal?

Mei Wen and Dan Sasaki

The Economic Record, 2001, vol. 77, issue 238, 283-290

Abstract: We analyse oligopolistic interactions between a welfare‐maximizing public firm and a profit‐maximizing private firm in a repeated game. We find that the public firm can hold excess capacity as a strategic punishment device to sustain a subgame perfect equilibrium which is welfare‐superior to the static Nash equilibrium. Basically, potential punishment from the public firm in the dynamic game can make the self‐interested private firm behave in the public interest. Furthermore, if capacity is endogenous, public excess capacity can occur in a welfare efficient equilibrium when the cost of public capacity investment is higher than that of private investment.

Date: 2001
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