Premium
Endogenous Cost Differentials between Public and Private Enterprises: A Mixed Duopoly Approach
Author(s) -
Matsumura Toshihiro,
Matsushima Noriaki
Publication year - 2004
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/j.0013-0427.2004.00394.x
Subject(s) - duopoly , microeconomics , production cost , welfare , profit (economics) , economics , production (economics) , industrial organization , business , product differentiation , strategic complements , fixed cost , market economy , cournot competition , mechanical engineering , engineering
We investigate a mixed duopoly, where a state‐owned welfare‐maximizing public firm competes against a profit‐maximizing private firm. We use a Hotelling‐type spatial model which represents product differentiation. We endogenize production costs by introducing cost‐reducing activities. We show that the private firm's cost becomes lower than the public firm's because the private firm engages in excessive strategic cost‐reducing activities. Even though each firm's cost is heterogeneous, the locations of the firms are socially efficient, given the cost differentials. Privatization of the public firm would improve welfare because it would mitigate the loss arising from excessive cost‐reducing investments.