Would Excess Capacity in Public Firms Be Socially Optimal?

Authors: Wen, Mei¹; Sasaki, Dan²

Source: The Economic Record, Volume 77, Number 238, September 2001 , pp. 283-290(8)

Publisher: Blackwell Publishing

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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.

Document Type: Original article

DOI: 10.1111/1475-4932.t01-1-00023

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

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