This paper studies capacity choice in a quantity-setting mixed duopoly with differentiated goods, when the objective function of the private firm is its relative profit. In this paper, we show that the differences between the output levels and capacity levels between both the public firm and the private firm strictly depend on both the degrees of product differentiation and of importance of the private firm’s relative performance. More precisely, we find that the public firm chooses over-capacity when both the degrees of importance of the private firm’s relative performance and of product differentiation are sufficiently high whereas it chooses under-capacity otherwise, and further the private firm chooses under-capacity when the degree of importance of its relative performance is high as compared the degree of product differentiation whereas it chooses over-capacity otherwise.

This is the first paper to consider the endogenous timing in mixed duopoly with subsidization. Pal (Economics Letters, Vol. 61 (1998), pp. 181-185) shows that private leadership is always an equilibrium outcome in a mixed duopoly without any subsidy. By including the production subsidy, we observe that private leadership may disappear from equilibrium and that Cournot and public leadership become the likely equilibrium outcomes. Furthermore, we find that when firms have identical technologies the first-best allocation can be attained by the same subsidy before and after privatization even though firms' production timings are endogenized. Finally, we examine privatization with lobbying activities and show that such privatization leads to the deterioration of social welfare. Copyright � 2009 The Authors. Journal compilation � 2009 Blackwell Publishing Ltd and The University of Manchester.

In this paper we analyze the capacity choice in a mixed duopoly, considering the separation between ownership and management of firms. We introduce the following two alternatives as each firm's delegation type to its manager: (i) partial delegation-delegating only the quantity setting, and (ii) full delegation-delegating the determination of both capacity and quantity levels. First, we investigate each firm's capacity scale relative to its quantity, given its delegation type. Second, we derive the equilibrium delegation type of each firm under the endogenous decision by its owner. Finally, we consider the effect of privatization on each firm's delegation type and social welfare.

This paper analyzes the capacity choice issue under a price-setting mixed duopoly with differentiated goods, when the objective function of the private firm is its relative profit. In this paper, we show that the public firm chooses over-capacity irrespective of the degree of product differentiation and the degree of importance of the relative performance of the private firm. In contrast, we find that the difference between the output and capacity levels of the private firm strictly depends on both the degree of product differentiation and the degree of importance of its relative performance. More precisely, the private firm chooses over-capacity when the degree of importance of its relative performance is high relative to the degree of product differentiation, whereas it chooses under-capacity otherwise.