Endogenous Horizontal Product Differentiation in a Mixed Duopoly

This paper studies endogenous horizontal product differentiation in a mixed duopoly. In the basic model in which firms have symmetric costs, we find that (i) product differentiation arises provided differentiation costs are sufficiently low; (ii) under Cournot competition, the welfare maximizing public firm always obtains more incentive for product differentiation, and the products are more differentiated in the mixed duopoly than in the private duopoly; and (iii) under Bertrand competition, the private firm invests in product differentiation when differentiation costs are at moderate levels while the public firm does so when differentiation costs are sufficiently low. The products may be more or less differentiated in the mixed duopoly depending on the differentiation costs. Two extensions of the basic model are also examined: one with a foreign private firm and the other with asymmetric costs.