Mixed oligopoly, cost-reducing research and development, and privatisation

We develop a mixed oligopoly model to examine the role of R&D subsidies and evaluate the welfare effects of privatisation. In solving the oligopoly model we propose a novel use of aggregative games techniques. Our analysis reveals that privatisation reduces the optimal R&D subsidy. Furthermore, privatisation improves social welfare but only when the number of firms is sufficiently large. Implementing solely a subsidy to R&D does not lead to a ‘privatisation neutrality theorem’ or ‘irrelevance result’.