J Econ (2016) 118:167184

DOI 10.1007/s00712-015-0467-z

Mixed oligopolies and collusion

Stefano Colombo1

Received: 26 May 2015 / Accepted: 18 November 2015 / Published online: 30 November 2015
Springer-Verlag Wien 2015

Abstract We introduce a firm partially owned by the government in a dynamic

model of collusion between a subset of private firms. We show that increasing the
public ownership of the non-colluding firm may help collusion between the private
firms.

Keywords Mixed oligopolies Collusion

JEL Classification D43 L13

1 Introduction

This article considers the case of a mixed oligopoly, that is, an industry where private
firms co-exist with a public or semi-public firm. The vast and increasing literature on
mixed oligopolies dates back to Merrill and Schneider (1966), and now comprehends

I would like to thank the Editor Giacomo Corneo and three anonymous reviewers whose suggestions
greatly improved this work. I wish to thank Toshihiro Matsumura, Luigi Filippini, Noriaki Matsushima,
Akira Ogawa, Nicola Doni, Federico Boffa, Lucia Visconti Parisio, Bruno Bosco, Vittoria Cerasi,
Johannes Meya and participants to XVI Centre for competition and regulatory policy workshop in Milan
(Italy), and SIDE-ISLE 9th Annual Conference, Lugano. All remaining errors are my own.

B Stefano Colombo
stefano.colombo@unicatt.it

1 Department of Economics and Finance, Universit Cattolica del Sacro Cuore, Largo A. Gemelli
1, 20123 Milan, Italy

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168 S. Colombo

a large array of questions.1 In particular, this study investigates long-run competition

and collusion in a mixed oligopoly. On one hand, long-run competition in mixed
oligopolies has been studied in the context of partial privatization by Matsumura and
Kanda (2005), Fujiwara (2007) and Cato and Matsumura (2012). Matsumura and
Kanda (2005) and Fujiwara (2007) consider the case of free-entry of private firms,
and they are mainly interested in the effects of the degree of privatization of the
public firm on the total welfare when goods are homogeneous and differentiated,
respectively, whereas Cato and Matsumura (2012) investigate the long-run effect of
foreign penetration in home markets on the optimal privatization policy of the public
firm. On the other hand, collusion between private firms in a super-game context has
received constant attention by scholars. For example, Chang (1991, 1992) and Hackner
(1995) investigate the impact of product differentiation on collusion sustainability,
Motta and Polo (2003) and Ishibashi and Shimizu (2010) explore the impact of leniency
programs on the collusive behaviour of private firms, Friedman and Thisse (1993),
Posada and Straume (2004) and Colombo (2011) consider partial collusion, whereas
Lambertini and Schultz (2003) and Albaek and Lambertini (2004) investigate the
choice of the strategic variable in a context of colluding private firms.
In the present article, we consider a situation where a number of private firms are
trying to constitute a cartel when also a non-colluding public or semi-public firm is
competing in the same market. Indeed, the private firms have the incentive to collude
in order to obtain greater profits even when they operate in industries where public
firms act as well. For example, a recent antitrust case handled by the Italian Antitrust
Authority (ref. I743-AGCM) involved four independent private firms carrying passen-
gers to and from Sardinia, and competing against a public-owned company that did
not participate to the collusive agreement. In the Netherlands, Dijkgraaf and Gradus
(2007) document the existence of collusion between private firms in the waste collec-
tion market. Notably, in this market, private firms compete not only with each other,
but also with public companies. Therefore, collusion between private firms is not a
priori prevented by the presence of public firms in the same market.
Starting from these observations, we investigate the impact of a public firm on
the conditions for the sustainability of collusion between the private firms. While the
literature on the conditions for collusion sustainability is rich, the role played by a
public firm in such a context has not been investigated yet.2
Therefore, we posit the following question: does the existence of a public or semi-
public firm favor the collusion between private firms? To answer this question, we
develop a parsimonious model of collusion in a dynamic game. There are two private

1 For example, in a context of mixed oligopoly, Cremer et al. (1991) and Matsushima and Matsumura (2003)
consider the locational choices of firms, Cato and Matsumura (2013) consider taxation, Matsumura (1998)
considers the optimal degree of privatization, Ishibashi and Matsumura (2006), Heywood and Ye (2009) and
Gil-Molt et al. (2011) study R&D competition between public and private firms, whereas Matsumura and
Ogawa (2012) and Scrimitore (2013) analyse the choice of the strategic variable. For a survey of theoretical
issues about mixed oligopolies, see for example De Fraja and Delbono (1990) or Ishibashi and Matsumura
(2006), while empirical investigations can be found in Megginson and Netter (2001).
2 One exception is a recent work by Delbono and Lambertini (2014), where it is shown that the threat of
nationalizing one private firm may act as device to reduce the incentive of the remaining private firms to
constitute a cartel.

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Mixed oligopolies and collusion 169

firms that try to set up a cartel. However, there is also another firm which does not
participate to the cartel. As in Matsumura (1998), the government owns a positive
proportion of the shares of the non-colluding firm. Therefore, the non-colluding firm
takes into consideration both its own profits and the social welfare: by varying the
weight attached to each of these two components in the firms objective function, we
cover all the intermediate cases between the two extreme situations where the non-
colluding firm is a purely private firm or a purely public firm. We analyse how variations
of the public quota in the non-colluding firm affect the sustainability of collusion
between the private firms. We find that increasing the public ownership of the non-
colluding firm may increase or decrease collusion sustainability between the private
firms. In particular, when the products are strongly substitutable, the existence of a
public or semi-public firm that does not participate to the cartel makes the punishment
in the case of a deviation from the agreement harsher and it makes the deviation less
profitable. This helps sustaining collusion, as it makes the conditions for collusion
sustainability milder. The opposite holds when the products are weak substitutes.
The rest of this article proceeds as follows. In Sect. 2 we introduce a simple model
with two colluding private firms and one non-colluding public or semi-public firm. In
Sect. 3 we discuss the conditions for collusion to be sustainable in equilibrium, and
we study the impact of public ownership in the non-colluding firm on the conditions
for collusion sustainability. Section 4 extends the basic model in several directions.
Section 5 concludes.

2 The model
In this section we introduce a parsimonious model of collusion between private firms,
when a public or semi-public firm is also in the market. This basic model will be
extended in Sect. 4.
Consider a market composed by three quantity-setting firms. Firm 1 and Firm 2 are
private firms, whereas Firm X is a public or semi-public firm.3 The marginal costs are
constant and they are equal to c for the private firms, whereas they are equal to r for the
public firm.4 The firms produce differentiated goods. The utility function, separable in
income, of the representative consumer is the following (Dixit 1979; Singh and Vives
1984):
U (q X , q1 , q2 ) = u(q X , q1 , q2 ) + y (1)
 
2 1 2
where u(q1 , q2 , q X ) = a k=1 qk + q X 2 k=1 (qk + q X ) (q1 q2 + q1 q X +
2 2

q2 q X ), qk is the quantity of Firm k = {1, 2}, q X is the quantity produced by Firm X and

3 We refer to semi-public firm, as we allow for the possibility that the government holds a positive proportion
of the shares of Firm X (see later). As a limit case, the government entirely owns the firm. In this case Firm
X is a pure public firm.
4 All the results in this section can be replicated for the case of quadratic costs, which are commonly adopted
in the mixed oligopoly literature (see for example De Fraja and Delbono 1989; Fjell and Pal 1996). Details
are available by the author upon request. In general, constant marginal costs and increasing marginal costs
yield similar results. However, Matsumura and Okamura (2015) show an example where the results depend
on the type of the cost function adopted. Therefore, robustness check for quadratic costs is important when
considering mixed oligopolies.

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170 S. Colombo

y is the income of the representative consumer.5 Parameter [0, 1) represents the

degree of product substitutability. When = 0, the goods produced by the firms
are unrelated, while the higher is , the more the two goods are substitutable.6 The
problem of the representative consumer consists in the maximization of u(q1 , q2 , q X )
 2
k=1 pk qk p X q X , where p j is the price of the good produced by Firm j = {1, 2, X }.
We normalize the number of consumers to unity.
From the maximization of the utility function of the representative consumer, the
direct demand function for product j = {1, 2, X } follows (Dixit 1979; Singh and
Vives 1984):

pj = a qj qi , (2)
i= j

Therefore, the welfare function (given by the consumer surplus plus the total profits)
is the following:
 2 

W =a qk + q X
k=1

1 2
(qk2 + q X2 ) (q1 q2 + q1 q X + q2 q X ) rq X c(q1 + q2 ) (3)
2
k=1

The objective functions of the firms composing the industry are as follows. Firm 1 and
Firm 2 maximize 1 = ( p1 c)q1 and 2 = ( p2 c)q2 , respectively, whereas Firm
X maximizes:

 = W + (1 )( p X r )q X (4)

where measures the public component in Firm X , or the inverse of the privatization
of Firm X (Matsumura 1998).
Collusion is modelled as follows. First, collusion is possible among the private
firms, whereas the public or semi-public firm cannot participate to the cartel.7 The
firms interact repeatedly in an infinite horizon with complete information. Second,
as shown by Shaffer (1995), Morasch (2000), Escrihuela-Villar (2008) and Martin
(2010), in the case of a colluding subset of firms and a non-colluding subset of firms,

5 Therefore, we assume a monopolistic sector with three firms producing differentiated goods, and a
competitive numeraire sector.
6 When = 1, the demand functions cannot be defined. For details, see Singh and Vives (1984).
7 We are assuming that Firm X does not participate to the cartel, even if it may be profitable for it to
participate to the agreement. This can be rationalized as follows. As noted for example by Escrihuela-
Villar (2008), collusion is much easier between similar firms. As Firm X s objective function is different
from the objective function of Firm 1 and Firm 2, including Firm X into the cartel might imply excessive
coordination costs (Thomadsen and Rhee 2007; Colombo 2013) and the agreement may not be reached.
Note that our model extends Escrihuela-Villar (2008), by assuming that the non-colluding firm may be a
public or semi-public firm.

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Mixed oligopolies and collusion 171

in each period the cartel behaves as a Stackelberg leader whereas the non-colluding
firms are the follower.8
Finally, we adopt the grim-trigger strategy of Friedman (1971), by assuming that
in the case of a deviation from the cartel all the firms revert to Cournot competition
forever.9 Collusion is sustainable as a sub-game perfect Nash equilibrium if and only
if the discounted value of the profits that each firm obtains under collusion exceeds the
discounted value of the profits that each firm obtains by deviating from the cartel agree-
ment. Formally, the following incentive-compatibility  constraint must besatisfied in
equilibrium for each firm participating to the cartel: t=0 tC D +
k k

t=1 k ,
t P

where k , k and k indicates the one-period collusive profits, deviation profits and
C D P

punishment (static Cournot) profits for Firm k = 1, 2, respectively, and indicates the
market discount factor, common to the firms, which indicates the weight attached to
the future. After rearranging, the incentive-compatibility constraint can be rewritten
as: , where:
kD kC
(5)
kD kP

We shall refer to as the critical discount factor. The incentive-compatibility con-

straint says that when the market discount factor is greater than the critical discount
factor collusion is sustainable in equilibrium, otherwise it is not sustainable. There-
fore, the critical discount factor represents a natural measure of the sustainability of
the collusive agreement: the greater is the smaller is the set of market discount
factors which support collusion (i.e. collusion is more difficult to sustain); vice-versa,
the lower is the larger is the set of market discount factors which support collusion
(i.e. collusion is less difficult to sustain).

3 The condition for collusion sustainability

Suppose that Firm 1 and Firm 2 have formed a cartel, and each of them produces the
collusive quantity qkC , k = 1, 2. Consider now Firm X . By maximizing  with respect
to q X given the quantity produced by the cartel, the best-reply function of Firm X is
 2 qkC
q X (qkC ) = ar2 . For the rest of the analysis, we consider the following modified

8 Intuitively, collusion involves negotiation costs and transaction costs (Thomadsen and Rhee 2007;
Colombo 2013), that make the collusive quantity a less flexible decision than the quantity set autonomously
by the non-colluding firm.
9 It is well known that other more sophisticated punishment mechanisms may exist. In particular, simple
penal codes as in Abreu (1986, 1988) with stick-and-carrot phases may be preferred (in the sense that
they allow expanding the discount factor set that supports collusion in equilibrium). However, the simple
two-phase penal code derived in Abreu (1986) for the case of quantity firms cannot be easily transferred to
the present model for two reasons. First, the optimality of the penal code in Abreu (1986) is shown under
the assumption of simultaneous moves by the players, while here, during the collusive phase, a sequential
play occurs. Second, using the optimal penal code at least for the limit case where all firms collude (as done
for example in Escrihuela-Villar 2008), is of limited interest here, as it is possible only in the case where the
semi-public firm is not active. Furthermore, the grim-trigger strategy is the most popular formulation, and it
has been adopted in several papers, as for example Gupta and Venkatu (2002), Matsumura and Matsushima
(2005) and Ishibashi and Shimizu (2010).

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172 S. Colombo


version of the best-reply function of Firm X : q X (qkC ) = q X (qkC ), where is a binary
variable that takes value 0 or 1. In words, when = 0, there are only two private firms
in the industry; when = 1, there are three firms in the industry, and one of them is
a public or semi-public firm. The binary variable will be used later in this section
to describe the impact of introducing a public firm into the industry, a situation which
can be captured by comparing the case where = 1 with the case where = 0.
Consider
 now the cartel. The profits function
of a cartel firm k = 1, 2 is given by:
kC = a qkC [q X (qkC ) + qkC ] c qkC . By maximizing with respect to qkC , we
get the equilibrium collusive quantity produced by a member of the cartel: qkC =
a(2 )c(2)+r
2[2(1+ 2 )(1+ )]
. The collusive profits of a cartel member then follow:

[a(2 ) c(2 ) + r ]2
kC = (6)
4(2 )[2(1 + 2 ) (1 + )]

Suppose now that one of the cartels members has deviated from the agreement. After
a deviation, the cartel breaks up, and we have a simple Cournot game between firms
having different objective functions (Escrihuela-Villar 2008). The equilibrium quantity
)c(2)+r
of Firm k = {1, 2} is: qkP = a(2 (2)(2+ )2 2
. The equilibrium profits of a
private firm under the punishment stage are:

[a(2 ) c(2 ) + r ]2
kP = (7)
[2(2 + 2 ) (2 + )]2

Suppose now that a private firm deviates from the cartel agreement by setting qkD .
ar (q D +q C )
The best-reply function of Firm X now becomes q X (qkD , qk
C ) = k k
.
 2
The one-period gain from deviation is therefore: k = a qk [q X (qk , qk )+
D D D C

C ] c q D . Maximizing D with respect to q D we get the deviation quantity set
qk k k k
by the deviating firm. That is: qkD = [a(2 4(2
)c(2)+r ][(2+ )(2)3 2 ]
2 )[(2+ )(2)2 2 ] . Con-
sequently, the one-shot deviation profits are:

[a(2 ) c(2 ) + r ]2 [(2 + )(2 ) 3 2 ]2

kD = (8)
16(2 )(2 2 )[(2 + )(2 ) 2 2 ]2

Having derived the collusive profits, the deviation profits and the punishment profits,
we are in the position to write the critical discount factor by using (5). That is:

kD kC
. (9)
kD kP

We want to study how impacts on the sustainability of the collusive agreement. First,
c and r has no impact on the critical discount factor as they simplify and cancel out.
Therefore, the asymmetries in the costs between the private and the public firms do
not impact on collusion sustainability. The next proposition illustrates the impact of

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Mixed oligopolies and collusion 173

public ownership of the non-colluding firm on the collusion sustainability between

the private firms:
Proposition 1 The critical discount factor increases with until 2 2 and
then it decreases.
Proof The proof consists in verifying that / = 0 at and checking the sign of
/ under the admissible values of the parameters.

Proposition 1 shows that increasing the public ownership of the non-colluding
firm may increase or decrease collusion sustainability between the private firms. In
particular, the critical discount factor initially increases with , but after a threshold
it decreases with . Therefore, increasing the public share in Firm X initially has
a negative impact on collusion sustainability, but after a threshold it has a positive
impact on collusion sustainability. The intuition is the following. When considering
(6), (7) and (8), it can be observed that they decrease with . Indeed, the more Firm X is
similar to a pure public firm, the more it wants to produce a large quantity of output
in order to increase welfare. Intuitively, a larger quantity produced by the public firm
decreases the price, thus enlarging the surplus of the representative consumer, and,
henceforth, the total welfare. However, this attitude of the public firm has contrasting
effects on collusion sustainability. On one hand, by producing more, the semi-public
firm reduces the profits that, all else being equal, each private firm can obtain during
the collusive stage. This tends to reduce collusion sustainability. However, when Firm
X has a larger public ownership, it wants to produce more even when the private
firms are not colluding (the punishment stage) and when one private firm has deviated
from the collusive agreement (the deviation stage). It follows that both the punishment
profits and the deviation profits are reduced when is larger, and this, by making the
punishment harsher and the deviation less profitable, tends to increase the likelihood

that collusion emerges as a sub-game perfect equilibrium. Furthermore, note that
0. Indeed, when the products are strong substitutes, the cartel is able to internalize most
of the non-cartel firms reaction: thus, the pro-collusive effect during the punishment
and the deviation phase dominates. The opposite holds when the products are weak
substitutes.10 In more general terms, the increase of the industry output caused by
the public ownership of the non-colluding firm may help collusion, by making the
punishment harsher and reducing the incentive to each private firm to deviate from the
cartel agreement.
A related question regards the impact on collusion sustainability of introducing a
public firm into the industry. This describes a situation where a public firm is created
in a context where the private firms are already operating. In terms of our model, this
amounts to compare the critical discount factor when = 0 and when = = 1.
The next proposition illustrates under which condition the creation of a public firm
may help the collusion between the private firms:
Proposition 2 Introducing a public firm decreases (increases) the critical discount
factor if ()0.7.

10 In particular, when 1/2, strictly increases with ; instead, strictly decreases with only when
= 1.

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174 S. Colombo

Proof The proof consists in checking the sign of the equation ( = = 1) ( =

0) which is negative (positive) if ()0.7.


Therefore, Proposition 2 shows that introducing a public firm into the competitive
arena may increase or decreases the sustainability of a collusive agreement between
the private firms. In particular, the creation of a public firm is more likely to favour col-
lusion between the private firms when the products are strong substitutes, consistently
with the finding in Proposition 1.
Finally, we discuss the case of a drastic switch from a full private ownership to
a full public ownership in the non-colluding firm (nationalization of a private firm),
and vice-versa (privatization of a public firm). In terms of our model, this amounts to
assume that = 1 and compare the critical discount factor when = 1 and when
= 0.11 The following proposition can be stated:

Proposition 3 Nationalizing a private firm decreases (increases) the critical discount

factor if ()0.62

Proof The proof consists in checking the sign of the equation ( = = 1) ( =

1, = 0) which is negative (positive) if ()0.62.


Therefore, and consistently with Proposition 1, nationalizing a private firm helps

collusion between the private firms when the products are highly substitutable. Indeed,
when the products are highly substitutable, the punishment is harsher and the deviation
is less profitable if a public firm is present. Therefore, the public firm has a pro-collusive
effect, thus softening the conditions for collusion sustainability between the private
firms.

4 Extensions

4.1 N private firms

In this section, we extend the basic model by allowing the existence of N +1 firms, with
N 3, divided in three subsets. The first subset, denoted by G, includes the private
firms, indexed by k = 1, . . . , K (with K 2), that aim to constitute a cartel; the
second subset, denoted by I , includes the private firms, indexed by i = K + 1, . . . , N ,
that do not participate to the cartel; finally, the last subset includes only the public or
semi-public firm (Firm X ), which does not participate to the cartel. We simplify by
assuming that c = r = 0. The demand function (2) can be generalized as follows:
 
 
p j = a q j qk + qi + q X q j (10)
kG iI

where j = {1, . . . , K , K + 1, . . . , N , X } and the superscript is used here and

after to refer to the extended model. The welfare function becomes:

11 We are assuming that the switching private firm does not collude.

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Mixed oligopolies and collusion 175

   
  1   
W = a qk + qi + q X qk2 + qi2 + q X2 qi ql
2
kG iI kG iI i,lI,i=l
 
   
+ qk q f + qi qk + q X qk + qi (11)
k, f G,k= f iI,kG kG iI

Using the fact that, within each subset, the firms are symmetric, it must be qi = ql ,
i, l I , and qk = q f , k, f G. Therefore, the welfare function in (11) can be
re-written in the following more manageable equation:

K qk2 + (N K )qi2 + q X2
W = a[K qk + (N K )qi + q X ]
 2
[q X (K q K + (N K )qi ) + K (K21) qk2 +
(12)
+ (N K )(N 2
K 1) 2
qi + K (N K )qk qi ]

The objective functions of the firms composing the industry are as follows. A private
firm belonging to G maximizes
k = pk qk ; a private firm belonging to I maximizes

i = pi qi ; Firm X maximizes  = W + (1 ) p X q X . In what follows we derive

the conditions for collusion sustainability in the extended model. Let us consider
first the collusive stage. The firms belonging to Ghave formed a cartel, and each of
them produces qkC . A private firm i I belonging to the competitive fringe takes
qkC , ql , l = i I , and q X as given, and maximizes
i with respect to qi . There-
a [q +K (q C q )+(N 1)q ]
fore, its best-reply function is: qi (qkC , ql , q X ) = X k
2
l l
. Consider
Firm X , also belonging to the competitive fringe. It takes qk and qi , i I , as
C

given, and it maximizes  with respect to q X . Its best-reply function is therefore:

a [N q K (q q C )]
q X (qkC , qi ) = i
2
i k
, with = {0, 1}. Using the fact that the com-
petitive private firms are symmetric, in equilibrium it must be: qi = ql . Using this
fact and solving the best-reply functions system composed by N + 1 K equations,
(aK qkC )(2 )
we end up with the following quantities: qi (qkC ) = (K N ) 2 +(2)[2(1+K N ) ]
for
(aK qkC )(2 )
a private non-colluding firm, and q X (qkC ) = (K N ) 2 +(2)[2 (1+K N )]
for Firm
X . Considernow the cartel. The profits function of a cartel firm k G is given
by: kC = a qkC [q X (qkC ) + (K 1)qkC + (N K )qi (qkC )] qkC . By maxi-
mizing kC with respect to qkC , we get the equilibrium collusive quantity of a cartels
)(2 )
member: qkC = 2[2(2)+ (2)(N +Ka(23)+N 3 + 2 (2K N (2+ ))]
. Therefore,
the collusive profits of a cartels member can easily be derived.12 Consider now the
punishment stage. First, we replace qkC with qk . Second, as we have a simultane-
ous Cournot game, there is no difference between the private firms belonging to
set G or to set I . Therefore, in equilibrium, it must be that qk = qi , k G and

12 The explicit expressions of the profits and the critical discount factor are not reported here and they are
available upon request.

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176 S. Colombo

i I . Using this fact, we solve simultaneously qk (q X ) and q X (qk ), and we end

a(2 )
up with the equilibrium punishment quantities: q XP = (2)[2+ (N 1)]N 2
and
a(2 )
qkP = qiP = (2)[2+ (N 1)]N 2
, from which the equilibrium profits of a private
firm under the punishment stage can be derived. Suppose now that a Firm k G devi-
ates from the cartel agreement by setting qkD , whereas each firm f = k G sticks
to the collusive
 quantities. The one-period gain from deviation of Firm kis given
by: k = a qkD [q X (q Cf , qkD ) + (K 1)q Cf + (N K )qi (q Cf , qkD )] qkD .13
D

Maximizing kD with respect to qkD we get the deviation quantity set by Firm k, and
thus the deviation profits.
Table 1 illustrates the impact of on the critical discount factor for different values
of and K , when N = 10.14 We observe that when is high, a higher tends
to reduce the critical discount factor, whereas the opposite occurs when is low. In
addition, we observe that when the number of colluding firms (K ) is low with respect
to the total number of private firms (N ) the impact of on the critical discount factor
tends to be negative.
Intuitively, when there are few colluding firms, the semi-public firm does not
increase very much the production as a response to the formation of a cartel. Therefore,
the anti-collusive effect of an increase of is dominated by the pro-collusive effect
during the punishment and the deviation phase.

4.2 Price competition

The results in Sect. 3 have been obtained under the assumption that firms compete
through quantities. In this section we consider the case of price competition, and we
show that the results are qualitatively the same. We set = 1. The demandfunction

for product j = {1, 2, X } can be written as q j = 1+
a
11
2 p j 1 2 pi . By
i= j
proceeding as in Sect. 3, it is easy to find the equilibrium profits under the different
stages. Let us denote: R r (1 + ) + a[2 + + 2 (2 7 ) 3 (1 ) +
] + c[2 + 2 (2 ) + 4 2 3 (2 8 )]. Under collusion, the profits of a
private firm are:

R2
kC =  
4(1 + )[(2 )2 + 2 (2 )2 4 6 (1 3 ) + 4 4 (1 + 3 )+
6 3 (2 9 + 4 2 ) 2 2 (2 11 + 5 2 ) + 4 5 (1 7 + 13 2 )]
(13)

13 Note that the best-reply function of both the semi-public firm and the non-colluding private firms takes
into account the fact that one of the cartels members has deviated.
14 The following numerical example has been repeated with different values of N . Details are available
upon request.

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Mixed oligopolies and collusion 177

Table 1 The impact of on the critical discount factor when N = 10 and = 1

Product Colluding firms Impact of on Product Colluding Impact of on

substitutability substitutability firms

= 0.1 K =2 Positive = 0.6 K =2 Negative

K =3 Positive K =3 Negative
K =4 Positive K =4 Inverse U-shape
K =5 Positive K =5 Positive
K =6 Positive K =6 Positive
K =7 Positive K =7 Positive
K =8 Positive K =8 Positive
K =9 Positive K =9 Positive
= 0.2 K =2 Inverse U-shape = 0.7 K =2 Negative
K =3 Positive K =3 Negative
K =4 Positive K =4 Negative
K =5 Positive K =5 Inverse U-shape
K =6 Positive K =6 Positive
K =7 Positive K =7 Positive
K =8 Positive K =8 Positive
K =9 Positive K =9 Positive
= 0.3 K =2 Negative = 0.8 K =2 Negative
K =3 Positive K =3 Negative
K =4 Positive K =4 Negative
K =5 Positive K =5 Inverse U-shape
K =6 Positive K =6 Inverse U-shape
K =7 Positive K =7 Positive
K =8 Positive K =8 Positive
K =9 Positive K =9 Positive
= 0.4 K =2 Negative = 0.9 K =2 Negative
K =3 Inverse U-shape K =3 Negative
K =4 Positive K =4 Negative
K =5 Positive K =5 Negative
K =6 Positive K =6 Inverse U-shape
K =7 Positive K =7 Inverse U-shape
K =8 Positive K =8 Inverse U-shape
K =9 Positive K =9 Inverse U-shape
= 0.5 K =2 Negative =1 K =2 Negative
K =3 Negative K =3 Negative
K =4 Positive K =4 Negative
K =5 Positive K =5 Negative
K =6 Positive K =6 Inverse U-shape
K =7 Positive K =7 Inverse U-shape
K =8 Positive K =8 Inverse U-shape
K =9 Positive K =9 Inverse U-shape

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178 S. Colombo

Table 2 The threshold value of

Product Threshold of Product Threshold of
in the inverse U-shape relation
substitutability substitutability
between the critical discount
factor and under Bertrand = 0.2 0.87 = 0.6 0.13
competition
= 0.3 0.58 = 0.7 0.06
= 0.4 0.38 = 0.8 0.02
= 0.5 0.23 = 0.9 0.01

Under the punishment stage, they are:

(1 )R 2
kP =
(1 + )[6 2 (1 2 ) + 3 (2 6 ) (2 )(2 + ) 4 (2 6 )]2
(14)

Finally, under deviation, the profits of the private firm are:

[4 + 3 (2 ) 2 2(1 7 ) 3 (3 10 )]2 R 2
kD =
[16(1 + )((2 )(1 + 2 ) + 2 2 3 (2 6 ))]2 [(2 )2 (1 + )
2 6 (1 4 ) + 6 3 (6 31 14 2 ) 2 (6 29 + 13 2 )
+2 5 (1 9 + 21 2 ) + 2 4 (1 7 + 19 2 )]
(15)

Plugging the profits into Eq. (5) yields the critical discount factor in the case of Bertrand
competition.15 As for the case of Cournot competition, the marginal costs of both the
private and the public firm cancel out and they do not play any role on collusion
sustainability. Furthermore, the impact of on the critical discount factor is inverse
U-shape as in the case of quantity competition. Indeed, initially increases with ,
but after a threshold it decreases with . Table 2 reports some numerical examples
showing the relevant threshold for different values of .

4.3 Multiple public firms

In this extension we consider the case where there is more than one public firm.16 In
particular, we consider the simplest case where two public firms compete with two
potentially colluding private firms through quantities. We maintain the same notation
as in Sect. 3. In addition, we assume that another public firm, say Firm Y , is active in
the industry. The welfare function now becomes:

15 The complete expression of the critical discount factor is omitted from the text as it is quite long.
16 In the mixed oligopoly literature, the case of multiple public firms is considered for example by Mat-
sumura and Okamura (2013), Bose and Gupta (2013) and Haraguchi and Matsumura (2015).

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Mixed oligopolies and collusion 179


2
1 2
2
Wm = qk + q X + qY (qk + q X2 + +qY2 )
2
k=1 k=1
(q1 q2 + q1 q X + q2 q X + q1 qY + q2 qY
+ q X qY ) r (q X + qY ) c(q1 + q2 ) (16)

whereas the objective functions of Firm X and Y are given by:

 X = W m + (1 )( p X r )q X (17)

Y = W m + (1 )( pY r )qY (18)
respectively.17 First, we consider the collusive stage. Given the collusive quantity
chosen by the private firms k = 1, 2, qkC , the public firms quantities are obtained

 X (q1C , q2C )/q X = 0
by solving the system , which yields q X (qkC ) = qY (qkC ) =
Y (q1C , q2C )/qY = 0
ar 2 qkC
2+ . By using these best-reply functions in the first stage, we find the collu-
a(2 )c(2+ )+2r
sive quantity chosen by the private firms, that is: qkC,m = 2[2+3 3 2 (1+ )]
.
[a(2 )c(2+ )+2r ] 2
The collusive profits follow: kC,m = 4[(2)2 + (86+ 2 )3 3 2 (32)]
. When
considering the punishment stage, the equilibrium profits of the private firms
are: kP,m = [a(2 )c(2+ )+2r ]2
[3 2 (4)2(2)]2
. Finally, under deviation, the profits
of the private firm that deviates from the collusive agreement are: kD,m =
[a(2 )c(2+ )+2r ]2 [2(2)+ (4)5 2 ]2
16(2+ )(2+ 2 2 )[2+ (3)3 2 ]2
. We can insert these profits into (5) to
get the critical discount factor, say . Then, by taking the derivative of m with
m

respect to , we can state the following proposition:

Proposition 4 In the case of two public firms, the critical discount factor increases
with until m 2 3 and then it decreases.
Proof The proof consists in verifying that m / = 0 at m and then checking the
sign of m / under the admissible values of the parameters.

Therefore, the inverse U-shape impact of on the critical discount factor remains
even in the case of multiple public firms. However, note that m < . It follows
that the parameter space where the critical discount factor is decreasing in is larger
when there are two public firms. That is, when there are multiple public firms it is
more likely that increasing the public ownership of the public firms makes it easier to
sustain collusion between private firms.

4.4 Different punishment strategy

The results in Sect. 3 have been obtained under the assumption that the private firms
adopt a grim-trigger strategy when implementing the collusive agreement. How-

17 We assume that the government owns the same share in both the semi-public firms.

123
180 S. Colombo

ever, the grim-trigger strategy is not the harshest punishment that can be imposed
to the deviating firm. Here we consider the most severe implementable stream of
profits of the deviator (Thomadsen and Rhee 2007; Colombo 2013), that consists
in driving the profits of the deviator to zero. This can be obtained by the pun-
ishing firm, say Firm 2, by setting q2 = acq1 q X , so that p1 (q2 ) = 0.
pun pun

Clearly, this quantity does not maximize the profits of Firm 2, but it minimizes the
profits of the deviating firm (Firm 1) by driving them to zero. It should be noted
that the equilibrium quantities during the punishment stage come from the solu-
/q X = 0
pun pun
tion of the system 1 /q1 = 0 , which yields q1 = 0, q X = 2 cr
and
pun
q2 = q2
pun )c(2)+r
q2 = a(2 (2 ) . To avoid corner solutions, we impose c r . Clearly,
the profits of the deviating firm during the punishment stage are zero. Therefore, the
kD kC 2 (2 )2
critical discount factor results from pun = = [(2)(2+ )3 2 ]2
. It is
kD
immediate to see that pun / 0. Therefore, increasing the public ownership in
Firm X always increases collusion sustainability between the private firms. Indeed,
(kD / kC / )(kD kP )(kD / kP / )(kD kC )
note that = . When kP = 0,
(kD kP )2
we observe that the second term at the numerator increases, but the first term at the
numerator decreases.18 In words, the fact that the punishment profits do not depend on
the degree of public ownership limits the pro-collusive impact of (the second term
in the numerator). However, the reduction of the punishment profits with respect to
the grim-trigger strategy amplifies the pro-collusive effect of the impact of on the
deviation profits (the first term in the numerator). As the latter effect dominates, we
have that the parameter space where has a negative impact on the critical discount
factor expands with respect to the case where kP > 0.

4.5 Optimal privatization

In this extension we consider the optimal privatization degree of Firm X chosen by

the government. In this section, we assume c = r = 0. As a full characterization of
the optimal privatization policy is too complex to derive, we limit to show that the
government may choose a level of in such a way to induce collusion between the
private firms. For example, suppose that = 0.7 and that the discount factor, , is
0.9. Figure 1 illustrates both the critical discount factor as a function of and the
discount factor . It follows that collusion between private firms emerges in equilibrium
when 0.15 and 0.81, whereas competition emerges in equilibrium when
[0.15, 0.81]. Figure 2 illustrates the overall surplus as a function of . Note
that, depending on the value of , either collusion or competition may emerge in
equilibrium.19

18 Note that D / C / < 0.

k k
19 Note that the government chooses in order to maximize W rather than .

123
Mixed oligopolies and collusion 181

Fig. 1 The discount factor and the critical discount factor when = 0.7 and = 0.9

Fig. 2 Total surplus when = 0.7 and = 0.9

As shown in Fig. 2, total welfare is maximized when 0.89, in the area where
collusion emerges in equilibrium. Indeed, by controlling a high quota of shares in
Firm X the government is able to induce a high level of total surplus even if the private
firms collude.
Of course, it may also be that, under different parameters, the surplus is maximized
under competition between the private firms. For example, suppose that = 0.3 and
= 0.7. Figure 3 illustrates both the discount factor and the critical discount factor
in this case. Therefore, collusion between private firms emerges in equilibrium when
0.76, whereas competition emerges in equilibrium when 0.76. In Fig. 4
the overall welfare, W , is represented as a function of . Figure 4 shows that the
optimal privatization level, 0.87, induces competition between the private firms
in equilibrium.

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182 S. Colombo

Fig. 3 The discount factor and the critical discount factor when = 0.3 and = 0.7

Fig. 4 Total surplus when = 0.3 and = 0.7

5 Conclusions

Firms try to collude in order to obtain higher profits. Even if this is prohibited by
antitrust legislations, cartels are well documented in the real world. An unexplored
question concerns the role that a public or semi-public firm operating in the same
market of the colluding firms may have in favouring or discouraging collusion between
the private firms. Indeed, attempts to collude are possible even in the context of mixed
markets, that is, in contexts where both public and private firms compete. Therefore,
this article studies the role of a public firm on the conditions of collusion sustainability
between a subset of private firms. In particular, we show that increasing the public
ownership of a non-cartel firm may help sustaining collusion between private firms.
This occurs because a non-cartel firm with a large public ownership tends to produce
more, thus making the punishment harsher and the deviation from the agreement less
profitable for each private firm. Therefore, the existence of a firm that includes the

123
Mixed oligopolies and collusion 183

welfare in its objective function may enhance cooperation between the firms that aim
to maximize their individual profits. Significantly, the discussion of the pros and cons
of the presence of a public firm operating into the market has scarcely considered the
impact on the likelihood that a tacit collusive agreement emerges among the private
firms. This paper has shown that an unintended consequence of the presence of a public
firm is that it may favour collusion between the private firms. This article suggests
the necessity to take into consideration this aspect when evaluating the impact of
introducing a public firm into the market arena or increasing/decreasing the control
by the government on an existing semi-public firm.

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