Excess Capacity Investment: Government versus Private Firms

A supergame between public and private firms in an oligopolist industry is studied in this paper. We discover that there is a repeated-game equilibrium where the public firm produces less than its one-shot Nash equilibrium quantity, nevertheless the total supply and hence the social welfare are higher than in the one-shot Nash equilibrium. In such an equilibrium, the public firm, who is a social welfare maximiser, contracts its production below its full capacity in order to encourage the private firm's expansion.