Tuesday, August 11, 2009
Posted by D. Daniel Sokol
Giuseppe De Feo (Department of Economics, University of Strathclyde) and Carlo Capuano (Department of Economics, University of Naples Federico II, Complesso Universitario di Monte S.Angelo) provide thoughts On Public Inefficiencies in a Mixed Duopoly.
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 rm that maximizes welfare may be preferred.