On Public Inefficiencies in a Mixed Duopoly

Carlo Capuano and Giuseppe De Feo

No 2009-35, SIRE Discussion Papers from Scottish Institute for Research in Economics (SIRE)

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.

Keywords: Mixed oligopoly; Nash equilibria; Endogenous Timing; Distortionary taxes (search for similar items in EconPapers)
Date: 2009
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Working Paper: On Public Inefficiencies in a Mixed Duopoly (2009)
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