4. Conclusion
Existing literatures on mixed oligopoly market usually focus on the competition relationship among firms, while in practice (partly) public firms may cooperate with domestic/foreign private firms. One important way of cooperation is through subcontracting. To fill the gap between theory and reality, we examine both competition and cooperation between a public firm and a foreign firm. We find that comparing to no subcontracting, the public firm is less aggressive in location choice, and social welfare is higher, when it subcontracts input production to the foreign firm. And the public firm will be more aggressive in its location and pricing choice when competing with foreign firm comparing to competing with domestic private firm. Social welfare is lower in presence of foreign firm, consumer welfare is higher. We also consider the case that foreign firm produces outside the country and thus the government can charge tariffs on either inputs or final goods or both. We find that firms’ locations and market shares are constant, i.e. independent of production costs or tariffs. We also find that the tariff on final goods has no effect on social welfare but hurts consumers. And the tariff on input can raise social welfare, but its effect on consumer welfare depends. If government only tariffs inputs, consumer surplus is lower, but if government tariffs both inputs and final goods, consumer surplus can be higher. In the paper, we assume perfect inelastic industry demand so that our model is comparable to existing literature which typically uses the same assumption17. Relaxing of this assumption may alter our results and requires further investigation. Since our focus is on the firms interaction at the final products market, as in Liang and Mai (2006), we treat the subcontracting in a relative simple way18. Future researches can introduce a more complex subcontracting contract and examine its effect on firms’ decision about subcontracting.
