Cournot vs Stackelberg Equilibria with a Public Enterprise and International Competition

This paper examines the validity of alternative assumptions about public enterprise strategies in the presence of both domestic and international competition. It extends the quantity-setting game to a preplay stage and endogenizes the firms' order of moves to show that i) Cournot competition is not the subgame perfect Nash equilibrium of the extended game, ii) the only SPN equilibria are sequential and iii) for some values of structural parameters, public Stackelberg leadership is the unique SPN equilibrium solution of the game. This has a significant consequence for debates over privatisation because with a public Stackelberg leadership game, there is no distortionary effect associated with the operation of a public enterprise in the domestic market