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Would Excess Capacity in Public Firms Be Socially Optimal?
Author(s) -
Wen Mei,
Sasaki Dan
Publication year - 2001
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/1475-4932.t01-1-00023
Subject(s) - microeconomics , subgame perfect equilibrium , oligopoly , economics , welfare , nash equilibrium , profit (economics) , investment (military) , punishment (psychology) , economic surplus , public economics , cournot competition , market economy , psychology , social psychology , politics , political science , law
We analyse oligopolistic interactions between a welfare‐maximizing public firm and a profit‐maximizing private firm in a repeated game. We find that the public firm can hold excess capacity as a strategic punishment device to sustain a subgame perfect equilibrium which is welfare‐superior to the static Nash equilibrium. Basically, potential punishment from the public firm in the dynamic game can make the self‐interested private firm behave in the public interest. Furthermore, if capacity is endogenous, public excess capacity can occur in a welfare efficient equilibrium when the cost of public capacity investment is higher than that of private investment.