A public firm in a vertically linked price discriminating spatial duopoly

- In a vertically linked duopoly, spatial competition between a public and a private firm induces them to deviate from the socially optimal location.
- We show how a change in the degree of privatization induces one firm to move toward, while the other moves away from the socially optimal location.
- Above (below) a critical level of privatization, public and private firms will come close (drift apart) with a rise in the degree of privatization.

We show that, in a vertically linked duopoly where neither firm can produce all varieties demanded, spatial competition between a public and a private firm induces them to deviate from the socially optimal location. We identify specific conditions under which a change in the degree of privatization induces one firm to move toward, while the other moves away from the socially optimal location. There exists a critical level of privatization above (below) which the public and private firms will come close (drift apart) with a rise in the degree of privatization.