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We investigate the optimal behavior of a public firm in a mixed market involving private firms and one public firm. Existing works show that welfare-maximizing behavior by the public firm is suboptimal when the number of firms is given exogenously. We allow free entry of private firms and find that, in contrast to the case with the fixed number of firms, welfare-maximizing behavior by the public firm is always optimal in mixed markets. Furthermore, we find that mixed markets are better than pure markets involving no public firm if and only if the public firm earns nonnegative profits. Copyright Springer-Verlag Wien 2005mixed oligopoly, privatization, entry restrictions, H42, L13, C72,

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We investigate Stackelberg mixed duopoly models where a stateowned public firm and a foreign private firm compete. We examine a desirable role (either leader or follower) of the public firm. We also consider endogenous roles by adopting the observable delay game of Hamilton and Slutsky (1990). We find that, in contrast to Pal (1998) discussing a case of domestic competitors, the public firm should be the leader and that it becomes the leader in the endogenous role game. We also find that in contrast to Ono (1990) eliminating a foreign firm does not improve domestic welfare in mixed oligopolies.

We investigate a mixed duopoly, where a state-owned welfare-maximizing public firm competes against a profit-maximizing private firm. We use a Hotelling-type spatial model which represents product differentiation. We endogenize production costs by introducing cost-reducing activities. We show that the private firm's cost becomes lower than the public firm's because the private firm engages in excessive strategic cost-reducing activities. Even though each firm's cost is heterogeneous, the locations of the firms are socially efficient, given the cost differentials. Privatization of the public firm would improve welfare because it would mitigate the loss arising from excessive cost-reducing investments.