PUBLIC MONOPOLY, MIXED OLIGOPOLYAND PRODUCTIVE EFFICIENCY* AKIRA NISHIMORI Aichi University HIKARU OGAWA  Nagoya University In general, the introduction of competition into the public sector seems to lead to higher cost- efficiency in service production. However, there are examples of substantial cost increases in some areas. In this paper, using a mixed oligopoly model, we investigate the effects of deregulation on the cost-reducing incentives of a public firm. Our results show that a firm that is a public monopoly has greater incentive to conduct cost-reducing investment than a public firm within mixed oligopoly market. I. Introduction Reforms based on opening public monopoly markets to the private sector has swept over the public sector in many countries. A central feature of these reforms is the introduction of competition into service markets that were previously monopolised by the public sector. Two favourable effects are expected by the introduction of such competition. First, suppression of monopoly rents and improvements in allocative efficiency: admitting private firms into a market brings about increased output and lower prices. Second, a higher level of productive efficiency in the public sector; cost-reducing incentives will emerge in the public sector’s service production when it faces private competitors. The effects of competition between public sector and private firms are typically analysed in the context of mixed oligopoly models, which incorporate public-owned welfare maximising firms within a standard oligopoly framework. There is a vast amount of literature examining allocative efficiency using mixed oligopoly models (Merrill and Schneider (1966), Harris and Wines (1980), Sertel (1988), De Fraja and Delbono (1989), Cremer et al (1989), Fershtman (1990), Matsumura (1998) etc.). One of the standard results in the literature is that the introduction of competition will raise public welfare if a sufficiently large number of private firms are permitted to enter the market. 1 There do not appear to be any studies which examine productive efficiency in mixed oligopoly markets. Current studies separate discussion of allocative efficiency from productive efficiency when considering the effects of competition in these markets. While competition between public firms and private firms appears to lead to greater efficiency in * The authors are grateful for comments by the referees. Ogawa acknowledges the financial support of the Japan Society for the Promotion of Science under Grant no. 12730058.  Correspondence: Hikaru Ogawa, School of Economics, Nagoya University, Furo-Cho, Chikusa-ku, Nagoya 464-8601, JAPAN. Email: ogawa@soec.nagoya-u.ac.jp 1 See De Fraja and Delbono (1990) for a general review of the mixed oligopoly model. Ó Blackwell Publishing Ltd/University of Adelaide and Flinders University of South Australia 2002.