PRICE-SETTING MIXED DUOPOLY, SUBSIDIZATION AND THE ORDER OF FIRMS’ MOVES: SUBSTITUTIVE, INDEPENDENT AND COMPLEMENTARY GOODS

Abstract

This paper uses a mixed Bertrand duopoly model comprising a public firm and a private firm, and investigates the role that production subsidies play in the mixed duopoly model regarding privatization and efficiency. The paper considers substitutive, independent and complementary goods, and examines the following three games: (i) the public firm and the private firm simultaneously and independently set their own prices, (ii) the public firm acts as a Stackelberg leader, and (iii) both firms act simultaneously and independently as profit-maximizers. The paper solves the three games and demonstrates that under the optimal subsidy of each of substitutive, independent and complementary goods, both firms’ profits, prices, outputs and economic welfare are respectively identical regardless of the nature of the competition.