Endogenous Competition with an Integrated Public Utility in a Mixed Duopoly Under Output Subsidy

This study considers a mixed downstream market wherein a vertically-integrated public utility competes with a private firm that purchases inputs from an upstream firm under output subsidies. We construct an endogenous competition mode game and find that not only do pure Cournot and Bertrand competitions appear as equilibria, but a hybrid Bertrand-Cournot competition can also materialize depending on the subsidy rates; however, Cournot competition appears as a unique equilibrium in a private market, irrespective of subsidy rates. Thus, privatization accompanied by a subsidization that can shift firms’ coordination from a hybrid Bertrand-Cournot to Cournot could improve welfare