Mixed Duopoly, Product Differentiation and Competition

Posted by D. Daniel Sokol

Minoru Kitahara, University of Tokyo – Faculty of Economics and Toshihiro Matsumura, University of Tokyo – Institute of Social Science discuss Mixed Duopoly, Product Differentiation and Competition

ABSTRACT: We examine the relationship between the equilibrium price and the degree of product differentiation in a mixed duopoly in which a welfare‐maximizing public enterprise competes against a profit‐maximizing private firm. Existing works on private economy show that increased product differentiation mitigates price competition. We find that, in a mixed economy, increased product differentiation can accelerate competition when the demand is elastic. The private firm chooses to locate itself too close to the public firm (and thus makes the resulting degree of product differentiation too low) for social welfare, which never appears in the private economy.