Mixed oligopoly, public firm behavior, and free private entry

• Published in: Economics letters Vol. 117; no. 3; pp. 767 - 769
• Main Authors: Bennett, John, La Manna, Manfredi
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.12.2012; Elsevier Science Ltd
• Subjects: Alliances; Entry; Market entry; Mixed oligopoly; Monopolies; Oligopoly; Privatization; Public enterprises; Public sector; Studies; Welfare; Welfare economics; P23; Mixed oligopoly; Entry; L32; Privatization; H32
• ISSN: 0165-1765; 1873-7374; 1873-7374
• DOI: 10.1016/j.econlet.2012.08.025

We analyze a mixed oligopoly with free entry by private firms, assuming that a public firm maximizes an increasing function of output, subject to a break-even constraint. We establish an irrelevance result: whenever a mixed oligopoly is viable, then aggregate output, aggregate costs and welfare are the same with and without the public firm. However, replacing a viable mixed oligopoly with a public monopoly yields higher net welfare. Implications for privatization policy are suggested. ► When a public firm is profit-constrained, its objective function is immaterial as long as it is increasing in the firm’s output. ► If a mixed oligopoly is viable under free entry, then it yields the same net social welfare as a free-entry all-private oligopoly. ► If a mixed oligopoly is viable under free entry, then a monopoly public firm yields strictly higher net social welfare.