Regulation versus Privatization in Mixed Duopoly with Quality Competition
Abstract
This paper introduces direct quality control into a quality competition framework with mixed duopoly firms, where the regulation is applied to the public firm only. Under this quality control, it is shown that the equilibrium prices are identical, meaning that all differentiation happens in the quality stage. Since there exists quality distortion, the first-best outcome cannot be reached. We further compare quality control with partial privatization, a policy also applied to the public firm only. This comparison is not subject to existing privatization neutrality results (Matsumura and Okumura, 2013; Kuo, Lai, and Ueng, 2020), because the two regimes represent qualitatively distinct policy instruments rather than different values of a single instrument. Systematic numerical analysis over the full (α, t) parameter space satisfying Assumption 2 shows that privatization at the welfare-maximising degree θ∗ ∈(0, 1) consistently dominates direct quality control across all tested parameter combinations. The welfare advantage arises primarily from superior quality alignment under privatization: equilibrium qualities move much closer to the socially optimal level, while the price-misallocation cost remains negligible (below 0.0003, or less than 0.003% of welfare, in all cases). JEL Classification Numbers. L22, L51
Citation Information
@article{fuchuanlai2026,
title={Regulation versus Privatization in Mixed Duopoly with Quality Competition},
author={Fu-Chuan Lai and K.L. Glen Ueng},
journal={Journal of Regulatory Economics},
year={2026},
doi={https://doi.org/10.21203/rs.3.rs-9351437/v1}
}
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