Review of Industrial Organization 22: 183–206, 2003.
© 2003 Kluwer Academic Publishers. Printed in the Netherlands.
Incentives for Anticompetitive Behavior by Public
DAVID E. M. SAPPINGTON
and J. GREGORY SIDAK
Department of Economics, University of Florida, 204 Matherly Hall, P.O. Box 117140,
Gainesville, FL 32611-7140, U.S.A. E-mail: sapping@uﬂ.edu
American Enterprise Institute for Public Policy Research, 1150 17th Street, N.W., Washington,
D.C. 20036, U.S.A. E-mail: firstname.lastname@example.org
Abstract. We examine the competitive behavior of a public enterprise that does not seek solely
to maximize its proﬁt. We ﬁnd that despite a reduced focus on proﬁt, a public enterprise may have
stronger incentives to pursue anticompetitive activities than does a private, proﬁt-maximizing ﬁrm.
These activities include setting prices below marginal cost, raising the operating costs of existing
rivals, erecting entry barriers to preclude the operation of new competitors, and circumventing
regulations designed to foster competition.
Key words: Anticompetitive behavior, public enterprises.
JEL Classiﬁcations: L44, H10, K21.
Most formal analyses of competition among ﬁrms assume that each ﬁrm seeks to
maximize its proﬁt. This is a reasonable approximation in many settings. But gov-
ernment (public) enterprises do not typically seek to maximize proﬁt, and public
enterprises compete directly with private, proﬁt-maximizing enterprises in many
important markets. For example, government postal ﬁrms often offer overnight
mail and package shipping services in direct competition with private delivery
companies. Public hospitals and educational institutions also compete directly with
private suppliers of similar services in many countries. Production by public enter-
prises can be particularly widespread in developing countries. During the 1980s,
for example, public enterprises accounted for approximately 14 percent of gross
domestic product (GDP) in African nations, and for approximately 11 percent of
GDP in developing countries as a whole (World Bank, 1995, p. 30).
We thank Gary Grizzle, Thomas Hazlett, John Mayo, John McKeever, Hal Singer, Gregory
Vistnes, seminar participants at the American Enterprise Institute, the Editor, and an anonymous
referee for helpful comments.
These statistics are consistent with Short’s (1984, p. 118) earlier ﬁndings that, on average, public
enterprises accounted for 8.6 percent of GDP and 27.0 percent of capital formation in the late 1970s.
The corresponding percentages for Africa were 17.5 and 32.4, respectively.