Welfare-improving mixed collusion

We study collusion between a public firm and a private firm, focusing on the impact of the public firm’s preference for consumer surplus. We characterize the collusive outcome (market shares, profits, consumer surplus and welfare) that results from Nash bargaining between the two firms, compare it with the competitive outcome, and study sustainability of collusion. If the public firm’s preference for consumer surplus is mild, collusive outcomes are qualitatively similar to those of a private duopoly (both firms reduce output) although distorted by the public firm’s bias towards high output. If the public firm’s preference for consumer surplus is strong, the collusive outcome is qualitatively different. While the public firm reduces output, the private firm expands output to such an extent that total output increases (as long as the public firm’s preference for consumer surplus is not excessive). Output is transferred from the public firm to the private firm so that productive efficiency increases, resulting in higher profits and welfare.