Excess Capacity Investment: Government versus Private Firms

D. Sasaki and M. Wen

No 626, Department of Economics - Working Papers Series from The University of Melbourne

Abstract: A supergame between public and private firms in an oligopolist industry is studied in this paper. We discover that there is a repeated-game equilibrium where the public firm produces less than its one-shot Nash equilibrium quantity, nevertheless the total supply and hence the social welfare are higher than in the one-shot Nash equilibrium. In such an equilibrium, the public firm, who is a social welfare maximiser, contracts its production below its full capacity in order to encourage the private firm's expansion.

Keywords: INVESTMENTS; GOVERNMENT; PUBLIC ENTERPRISES (search for similar items in EconPapers)
JEL-codes: D43 H42 L32 (search for similar items in EconPapers)
Pages: 20 pages
Date: 1998
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