Abstract
The paper provides an explanation as to why public firms produce at higher average costs than private firms. To establish this results, we deal with a mixed duopoly allowing both firms to choose among various technologies. The corresponding cost functions can be interpreted as the consequence of different investment levels in research and development. We show that a private firm has an incentive to operate at lower variable costs but higher fixed costs than a public firm. A comparison of a mixed duopoly with standard duopoly indicates how the allocation is affected by public production. Especially, it is shown that a standard duopoly may lead to a higher sum of consumer and producer surplus than a mixed duopoly.
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