PREDATION BY PUBLIC-ENTERPRISES

This paper demonstrates that, in addition to the usual Niskanen-type losses generated by excess production by public firms, there is an unrecognized second type of loss. In order to sell their excess production, public firms have to price their output below the competitive price and thereby cause more efficient firms (at the margin) to be eliminated. The discussion is then extended to include the case where public enterprises finance additional expansions of output by price-discriminating against inframarginal customers but then face the threat of competition for these inframarginal customers from new potential entry. Public enterprises are further shown to provide more credible threats to potential entrants since, unlike private firms, they value the increased output associated with predation and not merely the higher future benefits produced by it. © 1990.