This paper studies capacity choice in a quantity-setting mixed duopoly with differentiated goods, when the objective function of the private firm is its relative profit. In this paper, we show that the differences between the output levels and capacity levels between both the public firm and the private firm strictly depend on both the degrees of product differentiation and of importance of the private firm ’ s relative performance. More precisely, we find that the public firm chooses over-capacity when both the degrees of importance of the private firm ’ s relative performance and of product differentiation are sufficiently high whereas it chooses under-capacity otherwise, and further the private firm chooses under-capacity when the degree of importance of its relative performance is high as compared the degree of product differentiation whereas it chooses over-capacity otherwise.
KeywordsMixed DuopolyRelative ProfitDegree of Importance of the Relative Performance
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