Vertically Differentiated Mixed Oligopoly with Quality-dependent Fixed Costs

Authors

  • Stefan Lutz,

    1. University of Manchester
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  • Mario Pezzino

    1. University of Manchester
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    • Lutz is also a research fellow at the Instituto Complutense de Analisis Economico (ICAE), Madrid, Spain, the International Centre for Economic Research (ICER), Torino, Italy, and the Institute for Research in Economic and Fiscal Studies (I.R.E.F.), Luxembourg. We are grateful for support provided by the Spanish Ministry of Education and Science (Grant No. ECO2008-06191). We would like to thank Joanna Poyago-Theotoky, Iñigo Herguera and participants to the EARIE conference, Istanbul 2010. We also thank the Editor and an anonymous referee for helpful comments and suggestions. The views expressed in this paper are solely those of the authors and do not necessarily reflect those of the institutions they are affiliated with.

Abstract

The paper studies duopolistic competition when firms face fixed quality-dependent costs of production and one of the two firms targets (at least in the long run) welfare maximization. We show that mixed oligopoly is in general socially desirable compared with a private duopoly regardless of the type of competition in the short run and the equilibrium quality ranking. In addition, the nationalization of one of the firms seems to be a more efficient regulatory instrument than the adoption of minimum quality standard or subsidization of the high-quality provider.

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