Thursday, July 1, 2010
Posted by D. Daniel Sokol
Stefan Bühler (Institute of Public Finance and Fiscal Law - University of St. Gallen) and Simon Wey (University of Zurich) discuss Demand-Enhancing Investment in Mixed Duopoly.
ABSTRACT: This paper examines demand-enhancing investment and pricing in mixed duopoly. We analyze a model with differentiated products and reduced-form demand, making no assumptions on the relative efficiency of the public firm. First, we derive sufficient conditions for public investment to crowd out private investment. Second, we characterize the conditions under which individual investments (prices, respectively) in the mixed duopoly are higher (lower) than in the standard duopoly. Third, we show that with linear demand the public firm effectively disciplines the private firm, inducing an improvement in its price-quality ratio relative to the standard duopoly.