Excess capacity in a mixed oligopoly

Official URL: http://risc01.sabanciuniv.edu/record=b1669249 (Table of Contents)

I consider a two-stage mixed duopoly game where a public firm proposes a capacity allocation and a private firm has the option to either accept the allocation and enter the market or reject it and not enter the market in the first stage and the firms engage in a price competition in the second stage. The private firm aims to maximize its profit whereas the public firm aims to maximize social welfare. I show that while the private firm operates at full capacity, the public firm bears excess capacity in the equilibrium even though capacity investment is costly. The theoretical model is highly relevant to the parking literature where the public firm represents on-street parking and the private firm represents a private parking garage. My finding provides alternative rationale for the advocated vacancy rate at on-street parking in the parking literature.