PRICE AND QUANTITY COMPETITION IN A UNIONISED MIXED DUOPOLY: THE CASES OF SUBSTITUTES AND COMPLEMENTS*

We investigate a differentiated mixed duopoly in which private and public firms can choose to strategically set prices or quantities when unions are present. For the case of a unionised mixed duopoly, there exists a dominant strategy only for the public firm that chooses Bertrand competition irrespective of whether the goods are substitutes or complements; there is no dominant strategy for a private firm. Thus, we show that regardless of the nature of goods, social welfare under Bertrand competition is always determined in equilibrium, wherein Bertrand competition entails higher social welfare than Cournot competition. Moreover, our main results hold irrespective of the nature of goods, with the exception that when a sufficiently large parameter of complements is employed, the ranking of a private firm's profit is not reversed, which is in contrast to the standard findings.     

Negotiation over Intellectual Property Rights Protection in a Mixed Market

This article models a North–South negotiation under a mixed oligopolistic setting where a public firm in the South and a private firm from the North compete in the southern market. The southern firm is a public one whose objective is a weighted sum of the South's social welfare and its own profit, whereas the northern firm is a pure profit maximizer. The North provides a quid pro quo in exchange for the strengthening of the enforcement of intellectual property rights (IPR) protection in the South. We show that when the northern and southern firms engage in quantity competition in the southern market, the southern government's optimal choice is either complete protection or complete violation. We show this to depend on the southern government's valuation of the quid pro quo. Moreover, strengthening IPR protection will deepen the privatization process in the South, though it brings about a social welfare loss to the South.     

Choosing Price or Quantity? The Role of Delegation and Network Externalities in a Mixed Duopoly

This paper considers a differentiated goods managerial mixed duopoly composed of one social welfare‐maximising public firm and one profit‐maximising private firm. We model the firm choice of the strategic contract. We find that when the strength of network effects is sufficiently strong, the price competition can become the unique equilibrium market structure. Furthermore, we show that there exists an area of the degree of product differentiation and the strength of network effects such that the situation wherein the public firm chooses its price contract whereas the private firm chooses its quantity contract can become the unique equilibrium structure.     

The Optimal Privatization Policies under an International Mixed Duopoly

This paper explores the socially optimal privatization policies under the setting of international mixed duopoly. We find that partial privatization is socially optimal under Cournot competition and private leadership competition, whereas full nationalization is socially optimal under public leadership competition. Moreover, the equilibrium social welfare under private leadership competition is higher than that observed under Cournot competition and that observed under private leadership competition, which differs from the findings of Matsumura ( 2003b ). We also show that the endogenous timing game has a subgame perfect Nash equilibrium outcome, under which the government chooses a partial privatization policy, and private leadership competition emerges as the optimal output decision sequence of firms. An important policy implication from this paper is that the government should partially privatize the public firm and facilitate the emergence of private leadership competition in an international mixed market.     

Foreign penetration and undesirable competition

This paper examines how the order of the firms' moves affects the social efficiency with foreign ownership and free entry in a mixed oligopoly market. We firstly show that when the foreign shareholding ratio is low, the entry of private followers will lead to a lower consumer welfare and higher social welfare, while the profit of the incumbent nationalized firm is higher under entry than under no entry. Further, we find that there always exists the problem of excessive entry under public leadership regardless of the degree of foreign ownership. Such result is generated by the complementary role played by the leading public firm and the strength of business-stealing effect. Our results thus have important implications for industrial and market-opening policies.     

Media Plurality: Private versus Mixed Duopolies

In this paper, we analyze the level of media plurality in a market with two private news firms (private duopoly) and in a market with a private news firm and a public news firm (mixed duopoly). In the private duopoly news firms maximize profits. In the mixed duopoly, the private news firm maximizes profits, while the public news firm maximizes social welfare. We show that, in spite of the public news firm maximizing social welfare, neither media plurality nor social welfare needs to be higher under the mixed duopoly compared with the private duopoly. This will depend on the relation between the costs of adapting news to readers' political preferences, the intensity of the readers' political preferences, and the size of the advertising market.     

Endogenous Choice of Strategic Contracts in a Mixed Duopoly with Bargaining Over Managerial Delegation Contracts

We revisit the endogenous choice problem of strategic contracts for the public firm and the private firm in a managerial mixed duopoly with differentiated goods. We consider the situation wherein the managerial delegation contracts are determined by maximising social welfare within the public firm, which is equal to the objective function of its owner, and through bargaining over the content of managerial delegation contracts between the owner and manager within the private firm. We show that, in equilibrium, when the manager of the private firm has high bargaining power relative to that of the owner, the public firm chooses a price contract, while the private firm chooses a quantity contract. However, there is no equilibrium market structure under the pure strategic contract class when the manager has sufficiently low bargaining power relative to that of the owner.     

Quality and Welfare in a Mixed Duopoly with Regulated Prices: The Case of a Public and a Private Hospital

Abstract. Hospital markets are often characterized by price regulation and the existence of different ownership types. Using a Hotelling framework, this paper analyses the effect of heterogeneous objectives of hospitals on quality differentiation, profits and overall welfare in a price‐regulated duopoly with exogenous symmetric locations. In contrast to other studies on mixed duopolies, this paper shows that, in this framework, privatization of the public hospital may increase overall welfare. This holds if the public hospital is similar to the private hospital or less efficient and competition is low. The main driving force is the single‐regulated price which induces under‐provision (over‐provision) of quality of the more (less) efficient hospital compared with the first best. However, if the public hospital is sufficiently more efficient and competition is fierce, a mixed duopoly outperforms both a private and a public duopoly due to an equilibrium price below (above) the price of the private (public) duopoly. This medium price discourages over‐provision of quality of the less efficient hospital and – together with the non‐profit objective – encourages an increase in quality of the more efficient public hospital.     

ALTERNATIVE STRATEGIES OF A PUBLIC ENTERPRISE IN OLIGOPOLY REVISITED: AN EXTENSION TO STACKELBERG COMPETITION

This paper revisits De Fraja and Delbono (1989), which is the seminal paper on mixed oligopoly, in order to pay more attention to Stackelberg competition. First, we show that, even in Cournot competition, if the number of private firms is sufficiently small, privatization necessarily reduces social welfare. Second, we demonstrate that when a public firm is a Stackelberg leader before and after privatization, privatization necessarily reduces welfare irrespective of the number of private firms. Moreover, we show that even when a public firm remains a follower, privatization reduces welfare if the number of private firms is relatively small.     

Do cost efficiency gap and foreign competitors matter concerning optimal privatization policy at the free entry market?

In this paper, we demonstrate that in contrast to the case with exogenous number of foreign private firms, partial privatization is always the best policy for the public firm in long-run equilibrium, which casts doubt on the robust result in Matsumura and Kanda (J Econ 84(1):27–48, 2005) who argued that welfare-maximizing behavior by the public firm is always optimal in mixed markets. Critical cost gap determines that long-run degree of privatization is larger than the short-run one. In particular, regarding the scenario wherein one public firm competes with domestic private firms and foreign private firms, equilibrium price is lower than marginal cost of public firm instead of being equivalent to marginal cost of the public firm, and that public firm’s outputs, profit, and social welfare is the smallest in the concerned mixed oligopoly models.     

Leadership and Privatisation in a Mixed Multi‐product Oligopoly: An Endogenous Timing Model

This paper examines both leadership choice and welfare consequences of privatisation in an endogenous timing mixed multi‐product oligopoly. It shows that a multi‐product firm undermines the welfare‐maximising efforts of a public firm by cross‐subsidising. The paper demonstrates that a unique subgame perfect Nash equilibrium emerges in a multi‐product market, in contrast to the multiple equilibria of a single‐product market. This unique equilibrium indicates that profit‐maximising private firms retain leadership while a welfare‐maximising public firm acts as a follower. Even on the off‐equilibrium path where the public firm acts as a leader, it rarely generates maximum social welfare. However, privatising the public firm usually harms social welfare and results in a different timing structure in equilibrium.     

Divestment and Bank Competition

We determine optimal divestment (partial privatization) and entry in banking in the context of a mixed oligopoly. When banks compete in deposits, greater entry is associated with higher divestment. However, social welfare improves with entry only when the private entrants are more efficient than the public bank. Further, when banks compete in interest rates with differentiated products, the public banks behavior resembles that of a price leader and it earns less profit than the private bank, if government holding in the public bank is sufficiently high. Competition becomes excessive in this case, and social welfare maximization requires greater divestment.     

Bertrand versus Cournot competition in a downstream mixed oligopoly with foreign ownership

Focusing on foreign ownership in the private firm, we examine the Cournot-Bertrand comparison in a mixed oligopolistic market with vertical market structure. We have found that if public and private firms were charged with uniform price for their inputs, then Cournot-Bertrand ranking in market outcomes confirms those obtained by Ghosh and Mitra (2010). This implies that under uniform pricing in the upstream sector, the vertical market structure does not have substantial influences on Cournot-Bertrand ranking. However, if discriminatory pricing is adopted, firm's profits, output, and social welfare are often reversed to those obtained from uniform pricing in the upstream sector. Given the closeness of products, if the share of foreign ownership is sufficiently low, social welfare in Cournot competition can exceed that of Bertrand competition, contrasting with the standard welfare ranking that Bertrand welfare is strictly higher than Cournot. This implies that Cournot competition can be more socially desirable than Bertrand in mixed oligopoly with vertical market structure if discriminatory pricing scheme is adopted by foreign upstream monopolists.     

Service Quality,Competition, and Regulatory Policies in the Postal Sector

This paper presents a simple model which illustrates the possible policy- and welfare-implications of endogenous product selection in the postal sector. The cost of a unit of mail depends on its "quality" (e.g., speed of delivery) and on the type and location of the addressee (firms, urban households, and rural households). Senders have inelastic demands and differ in their willingness to pay for quality. Addressees are passive but their utility may affect social welfare. Two operators play a two-stage game, first choosing qualities and then prices. We first show that the equilibrium with two private (profit maximizing) operators results in an inefficient provision of quality. Then, we consider the mixed (Nash) equilibrium with one private and one (welfare maximizing) public operator. If the budget constraint of the public firm is not binding, this equilibrium is shown to be first-best efficient even if social welfare accounts for the utility of addressees. If the budget constraint is binding, the mixed equilibrium is not efficient but yields a higher level of welfare than the private equilibrium. Finally, we study the impact of minimum quality standards within our setting.     

R&D competition between public and private sectors

We investigate a mixed market where a welfare-maximizing public research institute competes against profit-maximizing private firms. We investigate R&D competition by using a standard model of patent races where each firm chooses both its innovation size and R&D expenditure. We find that the innovation size (R&D expenditure) chosen by the public institute is too small (too large) from the viewpoint of social welfare, respectively, and so the government should control the public institute appropriately. We also discuss the welfare implications of privatization of public research institutes.     

On the Neutrality of Profit Taxation in a Mixed Oligopoly

This paper investigates the neutrality of profit taxation in a mixed oligopoly where one (partially) public firm competes with private firms. We find that the neutrality of a profit tax is robust under a general cost and a general demand function as long as the degree of privatization is endogenously determined. This result is also true when product heterogeneity is considered under both Cournot and Bertrand competition. By contrast, if the degree of privatization is exogenously given, the profit tax neutrality holds only in the cases where the public firm is fully privatized or fully state-owned; otherwise, the neutrality breaks down.     

A sample of observations on comparative prices in public and private enterprises

Assuming imperfect competition and economy-wide welfare maximization, public enterprises should have lower profit margins and thus with comparable costs should have lower prices than private companies carrying on the same activity. Data from a sample of comparable Indonesian public and private enterprises show lower public enterprise profit margins, but they also show higher costs, so that public enterprise prices were not lower than private enterprise prices. An attempt is made to explain and generalize on these results.     

State-owned enterprises as indirect instruments of entry regulation

In the context of mixed markets, Matsumura and Kanda (J Econ 84(1): 27–48, 2005) show that social welfare in free entry equilibrium is maximized when there exists a public firm in the market. En passant, these authors state that this outcome is connected to the entry-deterring influence of a public firm. In this way, they counter-act the excess entry problem of Mankiw and Whinston (Rand J Econ 17(1): 48–58, 1986). We explain this result arguing that the state-owned firm can be an indirect instrument to regulate entry. In fact, under free entry equilibrium welfare may be greater with the presence of a public firm than with a social planner.      

The merger paradox in a mixed oligopoly

This paper examines the set of surplus maximizing mergers in a model of mixed oligopoly. The presence of a welfare maximizing public firm reduces the set of mergers for which two private firms can profitably merge. When a public firm and private firm merge, the changes in welfare and profit depend on the resulting extent of private ownership in the newly merged firm. When the government sets that share to maximize post merger welfare as assumed in the privatization literature, the merger paradox will often remain and the merger will not take place. Yet, we show there always exists scope for mergers that increase profit and increase (if not maximize) welfare. Interestingly, these mergers often include complete privatization.     

Privatization when the public firm is as efficient as private firms

The literature on mixed oligopoly shows that when production costs are quadratic the public firm is privatized if the competition in the product market is high enough. Similarly, when the public firm is less efficient than private firms and the marginal costs of production are constant, the government privatizes the public firm if its efficiency is low enough. In this paper we analyze this issue assuming that the public firm maximizes the weighted sum of consumer surplus, private profit and the profit of the public firm. If all firms have the same marginal cost of production we obtain that for some value of parameters the government does not privatize the public firm regardless of how many private firms are competing in the product market. We also obtain that the consumer surplus can be lower in the mixed oligopoly than in the private oligopoly.