The Optimal Privatization Policies under an International Mixed Duopoly

This paper explores the socially optimal privatization policies under the setting of international mixed duopoly. We find that partial privatization is socially optimal under Cournot competition and private leadership competition, whereas full nationalization is socially optimal under public leadership competition. Moreover, the equilibrium social welfare under private leadership competition is higher than that observed under Cournot competition and that observed under private leadership competition, which differs from the findings of Matsumura ( 2003b ). We also show that the endogenous timing game has a subgame perfect Nash equilibrium outcome, under which the government chooses a partial privatization policy, and private leadership competition emerges as the optimal output decision sequence of firms. An important policy implication from this paper is that the government should partially privatize the public firm and facilitate the emergence of private leadership competition in an international mixed market.     

An analysis of entry-then-privatization model: welfare and policy implications

This study formulates a new model of mixed oligopolies in free entry markets. A state-owned public enterprise is established before the game, private enterprises enter the market, and then the government chooses the degree of privatization of the public enterprise (termed the entry-then-privatization model herein). We find that under general demand and cost functions, the timing of privatization does not affect consumer surplus or the output of each private firm, while it does affect the equilibrium degree of privatization, number of entering firms, and output of the public firm. The equilibrium degree of privatization is too high (low) for both domestic and world welfare if private firms are domestic (foreign).     

ALTERNATIVE STRATEGIES OF A PUBLIC ENTERPRISE IN OLIGOPOLY REVISITED: AN EXTENSION TO STACKELBERG COMPETITION

This paper revisits De Fraja and Delbono (1989), which is the seminal paper on mixed oligopoly, in order to pay more attention to Stackelberg competition. First, we show that, even in Cournot competition, if the number of private firms is sufficiently small, privatization necessarily reduces social welfare. Second, we demonstrate that when a public firm is a Stackelberg leader before and after privatization, privatization necessarily reduces welfare irrespective of the number of private firms. Moreover, we show that even when a public firm remains a follower, privatization reduces welfare if the number of private firms is relatively small.     

Privatization when the public firm is as efficient as private firms

The literature on mixed oligopoly shows that when production costs are quadratic the public firm is privatized if the competition in the product market is high enough. Similarly, when the public firm is less efficient than private firms and the marginal costs of production are constant, the government privatizes the public firm if its efficiency is low enough. In this paper we analyze this issue assuming that the public firm maximizes the weighted sum of consumer surplus, private profit and the profit of the public firm. If all firms have the same marginal cost of production we obtain that for some value of parameters the government does not privatize the public firm regardless of how many private firms are competing in the product market. We also obtain that the consumer surplus can be lower in the mixed oligopoly than in the private oligopoly.     

PRIVATIZATION AND EFFICIENCY GAIN IN AN INTERNATIONAL MIXED OLIGOPOLY WITH ASYMMETRIC COSTS*

This paper examines two policy instruments, privatization of the domestic public firm and imposition of a tariff on foreign private firms in an international mixed oligopolistic model with asymmetric costs. It first demonstrates that different orders of moves of firms will imply different government decisions on optimal tariff and on privatization policy. Following Hamilton and Slutsky (1990 ), this paper then uses an extended game to discuss endogenous roles. It indicates that the efficiency gain that highlights the importance of foreign competition is crucial in determining the welfare improving privatization policy. Moreover, the endogenous equilibria are associated with different government decisions on privatization.     

Mixed oligopoly, optimal privatization, and foreign penetration

This paper examines the impact of foreign penetration on privatization in a mixed oligopolistic market. In contrast to the simple framework of single domestic market with foreign entry by entry mode of foreign direct investment (FDI) or exports, our result shows that government should increase the degree of privatization along with increasing proportion of domestic ownership of multinational firms. Furthermore, we show that an increase in domestic ownership of multinational firms raises all domestic private firms' profit and social welfare, while it may either increase or decrease public firm's profit. With the aid of numerical example, intensive competition from private firms in general will enhance the degree of privatization gradually; in particular, the degree of privatization is lower in the presence of multinational firms.     

Do cost efficiency gap and foreign competitors matter concerning optimal privatization policy at the free entry market?

In this paper, we demonstrate that in contrast to the case with exogenous number of foreign private firms, partial privatization is always the best policy for the public firm in long-run equilibrium, which casts doubt on the robust result in Matsumura and Kanda (J Econ 84(1):27–48, 2005) who argued that welfare-maximizing behavior by the public firm is always optimal in mixed markets. Critical cost gap determines that long-run degree of privatization is larger than the short-run one. In particular, regarding the scenario wherein one public firm competes with domestic private firms and foreign private firms, equilibrium price is lower than marginal cost of public firm instead of being equivalent to marginal cost of the public firm, and that public firm’s outputs, profit, and social welfare is the smallest in the concerned mixed oligopoly models.     

PRICE AND QUANTITY COMPETITION WITH ASYMMETRIC COSTS IN A MIXED DUOPOLY: A TECHNICAL NOTE

We consider a mixed duopoly in which private and public firms can choose to strategically set prices or quantities when the public firm is less efficient than the private firm. Thus, even with cost asymmetry, we obtain exactly the same result (i.e., Bertrand competition) of Matsumura and Ogawa (2012) if Singh and Vives’ (1984) assumption of positive primary outputs holds. However, compared to endogenous determination of the type of contract without cost asymmetry, our main finding is that in the wider range of cost asymmetry, different type(s) of equilibrium related to or not related to the limit‐pricing strategy of the private firm can be sustained. Thus, when considering an implication on privatization, we may overestimate the welfare gain of privatization because Cournot competition takes place after privatization even though cost asymmetry exists between firms. While the result of Matsumura and Ogawa (2012) holds true if the goods are complements, we find the novel results in the case of substitutes.     

R&D competition between public and private sectors

We investigate a mixed market where a welfare-maximizing public research institute competes against profit-maximizing private firms. We investigate R&D competition by using a standard model of patent races where each firm chooses both its innovation size and R&D expenditure. We find that the innovation size (R&D expenditure) chosen by the public institute is too small (too large) from the viewpoint of social welfare, respectively, and so the government should control the public institute appropriately. We also discuss the welfare implications of privatization of public research institutes.     

Partial privatization in mixed duopoly

We investigate a quantity-setting duopoly involving a private firm and a privatized firm jointly owned by the public and private sectors. The private firm maximizes profits, while the privatized firm takes both profits and social welfare into consideration. We consider how many shares the government should hold in the privatized firm. We find that neither full privatization (the government does not hold any shares) nor full nationalization (the government holds all of the shares) is optimal under moderate conditions.     

Unions, government's preference, and privatization

By introducing the government's preference for tax revenues into the theoretical framework of unionized mixed oligopolies, this study investigates the efficiency of privatization. The results are twofold. First, regardless of the government's preference for tax revenues and the number of private firms, the government and the public firm do not always have an incentive to privatize the public firm even if the government places lesser emphasis on the tax revenues than on social welfare. Second, social welfare increases with an increased number of private firms regardless of the government's preference for tax revenues and decreases with the government's preference for tax revenues regardless of the number of private firms. Hence, the government can use tax more efficiently as a commitment device to control the union's wage demand so as to maintain lower wage level under unionized mixed oligopoly.     

Partial Privatization,Foreign Competition,and Optimum Tariff*

Using a simple international mixed oligopoly model with one public and one or more foreign firms, this paper examines the effect of partial privatization or foreign competition on optimum tariffs and finds that foreign competition lowers the optimal tariff rate but partial privatization raises it. This result implies that trade liberalization is welfare improving if a country opens up its economy by allowing foreign competition. However, the liberalization policy is not desirable when the country only partially or completely privatizes its publicly‐owned enterprises.     

Export rivalry,vertically-related markets,and optimal public ownership policy

This paper considers the optimal public ownership policy of an upstream firm which competes with a foreign private rival. Both firms supply a produced input to the domestic and foreign downstream firms that compete in an export market. The paper shows that complete privatization of the domestic upstream firm is never optimal. It will likely be fully nationalized if its market share is high, the domestic downstream firms' market share is low, and the total number of firms in the downstream is large. Simulation results reveal that the public firm's optimal profit margin may be negative and that the government ownership level may exhibit a reswitching phenomenon as the number of domestic downstream firms keeps growing. The paper sheds light on the possibility of using government ownership policy as a pseudo-trade and industrial policy.     

Partial privatization in mixed duopoly with price and quality competition

We analyze price and quality competition in a mixed duopoly in which a profit-maximizing private firm competes against a state-owned public firm. We first show that the welfare-maximizing public firm provides a lower quality product than the private firm when they are equally efficient. In order to maximize social welfare, government manipulates the objective of the public firm that is given by a convex combination of profits and social welfare. It is demonstrated that an optimal incentive of the public firm is welfare maximization under the absence of quality competition, but it is neither welfare maximization nor profit maximization under the presence of quality competition. The result supports a completely mixed objective between welfare and profit maximizations or partial privatization of the public firm.      

Uncovering asset stripping during China's privatization

This paper empirically studies the occurrence and extent of asset stripping via undervaluing public assets during the mass privatization of state-owned and collectively owned enterprises in China. Using three waves of a national survey of private firms, we provide evidence that state-owned and collectively owned assets were substantially underpriced, indicating the presence of corruption during privatization. Further analysis shows that the extent of underpricing is more severe in regions with less market competition or weaker property rights protection, and more pronounced for intangible assets such as intellectual property rights and land use rights. When comparing firm efficiency between privatized firms and de novo private firms, we find that the former group continues to enjoy considerable preferential treatments, yet significantly underperforms the latter, possibly due to continued government control and intervention. Finally, we provide evidence that insider privatization is an important source of corruption during the privatization process.     

Privatization,Underpricing, and Welfare in the Presence of Foreign Competition

We analyze privatization in a differentiated oligopoly setting with a domestic public firm and foreign profit‐maximizing firms. In particular, we examine pricing below marginal cost by the public firm, the optimal degree of privatization, and the relationship between privatization and foreign ownership restrictions. When market structure is exogenous, partial privatization of the public firm improves welfare by reducing public sector losses. Surprisingly, even at the optimal level of privatization, the public firm's price lies strictly below marginal cost, resulting in losses. Our analysis also reveals a potential conflict between privatization and investment liberalization (i.e., relaxing restrictions on foreign ownership) in the short run. With endogenous market structure (i.e., free entry of foreign firms), partial privatization improves welfare through an additional channel: more foreign varieties. Furthermore, at the optimal level of privatization, the public firm's price lies strictly above marginal cost and earns positive profits.     

The merger paradox in a mixed oligopoly

This paper examines the set of surplus maximizing mergers in a model of mixed oligopoly. The presence of a welfare maximizing public firm reduces the set of mergers for which two private firms can profitably merge. When a public firm and private firm merge, the changes in welfare and profit depend on the resulting extent of private ownership in the newly merged firm. When the government sets that share to maximize post merger welfare as assumed in the privatization literature, the merger paradox will often remain and the merger will not take place. Yet, we show there always exists scope for mergers that increase profit and increase (if not maximize) welfare. Interestingly, these mergers often include complete privatization.     

Mixed Oligopoly at Free Entry Markets

We investigate the optimal behavior of a public firm in a mixed market involving private firms and one public firm. Existing works show that welfare-maximizing behavior by the public firm is suboptimal when the number of firms is given exogenously. We allow free entry of private firms and find that, in contrast to the case with the fixed number of firms, welfare-maximizing behavior by the public firm is always optimal in mixed markets. Furthermore, we find that mixed markets are better than pure markets involving no public firm if and only if the public firm earns nonnegative profits.     

International Trade and Strategic Privatization

The literature on mixed oligopoly does not consider the strategic interaction between governments when they decide whether to privatize their publicly‐owned firms. In order to analyze this question, we consider two countries and assume that publicly‐owned firms are less efficient than private firms. We obtain that when the marginal cost of the publicly‐owned firms takes an intermediate value, each government wants it to be the government of the other country that privatizes its publicly‐owned firm. In this case, only one government privatizes, and that government obtains lower social welfare and producer surplus than the other.     

TO LIST OR TO MERGE? ENDOGENOUS CHOICE OF PRIVATIZATION METHODS IN A MIXED MARKET

When and how to privatize a public firm? This paper suggests that a welfare‐enhancing privatization may be triggered by a negative demand shock. When the shock is relatively mild, it is optimal to privatize a public firm by means of stock market listings; when the shock is sufficiently large, a public–private‐firm merger becomes optimal. This paper also considers a government that cares about privatization revenues and about social welfare. It characterizes how the weight attached to privatization revenues and the improvement in production efficiency of the privatized public firm through a stock market listing may affect the government's choices concerning privatization.