Comparing Bertrand and Cournot Outcomes in the Presence of Public Firms

23 Pages Posted: 5 Jan 2009

See all articles by Arghya Ghosh

Arghya Ghosh

UNSW Australia Business School, School of Economics

Manipushpak Mitra

University of Bonn - Institute of Economic Theory I

Date Written: January 5, 2009

Abstract

We revisit the classic comparison between Bertrand and Cournot outcomes in a mixed market with private and public firms. A departure from the standard setting, i.e., one where all firms maximize profits, provides new insights. A welfare-maximizing public firm's price is strictly lower while its output is strictly higher in Cournot competition. And whereas the private firm's quantity is strictly lower in Cournot (as in the standard setting), its price can be higher or lower. Despite this ambiguity, both firms, public and private, earn strictly lower profits in Cournot. The consumer surplus is strictly higher in Cournot under a linear demand structure. All these results also hold with more than two firms under a wide range of parameterizations. The ranking reversals also hold in a richer setting with a partially privatized public firm, where the extent of privatization is endogenously determined by a welfare-maximizing government. As a by-product of our analysis, we find that in a differentiated duopoly setting, partial privatization always improves welfare in Cournot but not necessarily in Bertrand competition.

Keywords: Bertrand, Cournot, public firms, partial privatization

JEL Classification: L13, H42

Suggested Citation

Ghosh, Arghya and Mitra, Manipushpak, Comparing Bertrand and Cournot Outcomes in the Presence of Public Firms (January 5, 2009). UNSW Australian School of Business Research Paper No. 2008 ECON 18, Available at SSRN: https://ssrn.com/abstract=1323262 or http://dx.doi.org/10.2139/ssrn.1323262

Arghya Ghosh (Contact Author)

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

Manipushpak Mitra

University of Bonn - Institute of Economic Theory I ( email )

Adenauerallee 24-26
D-53113 Bonn
Germany

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