Equilibrium Coexistence of Public and Private Firms and the Plausibility of Price Competition

We consider a differentiated product duopoly where a regulated firm competes with a private firm. The instrument of regulation is the level of privatization. First, the regulator determines the level of privatization to maximize social welfare. Thereafter, both firms endogenously choose the mode of competition (thatis, whether to compete in price or quantity). Finally, the two firms compete in the market. Under a very general demand specification, we show that when the products are imperfect substitutes (complements), public (strictly partially private) and private firms coexist. Moreover, in the second stage, the firms competein prices.