Public-private Collusion

Public-private Collusion

 

Filipa Mota

Católica Porto Business School

Joao Correia‐da‐Silva

Universidade do Porto

Joana Pinho

Catholic University of Portugal (UCP) - Católica Porto Business School

 

Abstract

We study collusion between a public firm and a private firm, characterizing the outcome (market shares, profits, and consumer surplus) that results from Nash bargaining between the two firms relative to the non-cooperative outcome. We find that if the public firm’s preference for consumer surplus is mild, both firms reduce output (as in a private duopoly). If it is intermediate, while the public firm reduces output, the private firm expands output to such an extent that total output increases. If it is strong, the output expansion by the private firm does not compensate for the output contraction by the public firm, and thus total output decreases. We also assess the impact of relative bargaining power and study collusion sustainability. Our results suggest that collusion reduces the productive inefficiency caused by the public firm being more expansionary, and may lead to higher profits and consumer surplus.