Privatization and subsidization in a quantity-price-setting mixed duopoly

Usually, market models analyse competition between firms with either quantity or price as decision’s variables. This paper analyses the effects of production subsidies in both mixed and privatized duopolies, in which one firm (the public one) sets the production output and the other one (the private firm) sets the price. Furthermore, we assume that both firms take their decisions simultaneously. We analyse unsubsidized and subsidized policies in both mixed and private markets. This analysis allows us to show that if optimal subsidies are used before but not after privatization, then privatization lowers social welfare. Furthermore, if optimal subsidies are used before and after privatization, then privatization also lowers social welfare, but increases the value of the subsidy.