Partial privatization in mixed duopoly with price and quality competition |
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Authors: | Koji Ishibashi Toyokazu Kaneko |
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Institution: | (1) Department of Economics, Keio University, 2-15-45 Mita, Minato-ku, Tokyo 108-8345, Japan;(2) Baring Asset Management (Japan) Limited, 2-11-1 Nagata-cho, Chiyoda-ku, Tokyo 100-6166, Japan |
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Abstract: | We analyze price and quality competition in a mixed duopoly in which a profit-maximizing private firm competes against a state-owned
public firm. We first show that the welfare-maximizing public firm provides a lower quality product than the private firm
when they are equally efficient. In order to maximize social welfare, government manipulates the objective of the public firm
that is given by a convex combination of profits and social welfare. It is demonstrated that an optimal incentive of the public
firm is welfare maximization under the absence of quality competition, but it is neither welfare maximization nor profit maximization
under the presence of quality competition. The result supports a completely mixed objective between welfare and profit maximizations
or partial privatization of the public firm.
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Keywords: | Mixed oligopoly Quality competition Strategic effect Partial privatization |
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