On the efficiency of private and state-owned enterprises in mixed markets

•We examine vertical product differentiation models with variable costs of quality.•We show that welfare is larger under mixed oligopoly than under private oligopoly.•However, profits are lower under mixed oligopoly than under private oligopoly.•Bertrand competition is found to benefit firms under mixed oligopoly.•Results help justify the existence and efficiency of SOEs in transitional economies.

We examine oligopoly models of vertical product differentiation in which producing firms face variable costs of quality development. We show that comparing to private oligopoly, mixed oligopoly - whereby state-owned enterprises (SOEs) and private firms coexist - enhances social welfare but reduces firms' profitability. We also demonstrate that Bertrand competition makes firms better off under mixed oligopoly but it makes firms worse off under private oligopoly compared with Cournot competition. These findings help to justify both the existence of SOEs and the efficiency of SOEs and private firms in mixed markets in transitional economies.