Abstract:

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.

Language: English

Document Type: Research article

Affiliations: 1: Division of Economics, RSPAS, ANU, ACT0200, Australia 2: Department of Economics, University of Exeter, Exeter, Devon UK