On competition and welfare enhancing policies in a mixed oligopoly

In a mixed quantity-setting oligopoly with an inefficient public firm, we investigate the optimal government intervention contrasting two different regulatory measures; (possibly partial) privatization and an output subsidy. We find that the effects of the policy implemented crucially depend on the decision timing. Using an interdependent payoff structure in the fashion of a delegation contract to model imperfect competition, we show that privatization incentives are generally larger if it takes place before private firms determine the degree of competition since, in this case, the private firms’ output is higher. On the contrary, if the regulator incorporates a production subsidy after the degree of competition is set, the private sector benefits from a high subsidy and achieves perfect collusion.