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Market distortions and public enterprise strategies in an international mixed oligopoly

Cornes, Richard and Sepahvand, Mehrdad (2005): Market distortions and public enterprise strategies in an international mixed oligopoly.

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Abstract

This study investigates the possible sources of distortions in an international mixed oligopoly. We extend the existing linear/quadratic model to a general framework and show that a public enterprise may either serve as a regulatory device or may itself create an additional level of distortion. Which of these is the case depends critically on the timing of firms output decisions. We then extend the basic quantity setting game to incorporate a preplay stage at which firms can choose the timing of action, rather than moving in an exogenously imposed sequence, in order to determine endogenously the equilibrium sequence of moves. We argue that the distortions associated with a public enterprise and the welfare gain of privatization found in earlier studies can be attributed to an arbitrary and unjustified modeling assumption concerning the order of play, rather than to public ownership.

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