Privatisation and vertical integration under a mixed duopoly

This paper analyses the privatisation of public firms when private firms may be vertically integrated with their suppliers. We consider a mixed duopoly with a vertically integrated public firm. The private firm bargains the price of the input with its supplier if they are not vertically integrated. We find that for a given bargaining power of the private firm, it vertically integrates with its supplier if goods are weak substitutes. We also find that there is less vertical integration in the mixed duopoly than in the private duopoly. Finally, in general, the public firm is privatised when goods are close substitutes and the bargaining power of the private firm is low enough.     

Indirect taxation with shadow cost of public funds in mixed oligopoly

We adopt a mixed oligopoly model, where a state-owned welfare-maximizing public firm competes with a profit-maximizing private firm, to compare the welfare effects of the specific and ad valorem tax in the presence of the shadow cost of public funds. Following the assumption of most previous literature that total output is constant under specific and ad valorem taxation, we find that, when the shadow cost of public funds exists, the tax policy must be adjusted according to the privatization level of the public firm; if the privatization level is low (medium, high), the government needs to adopt ad valorem (specific, ad valorem) tax. Moreover, the private firm will earn a higher (lower) profit under ad valorem tax than under specific tax, if the public firm is not fully privatized and the shadow cost of public funds is high (low).     

Mergers between local public firms

We consider a country made up of two regions, where each region owns a local public firm and a domestic private one. A national authority decides whether or not to merge the two local public firms. The result depends on whether the goods produced by the firms are homogeneous, substitutes or complements. We find that if the two local public firms produce the same good, the national authority is indifferent as to whether to merge or not. When local public firms produce different goods two cases arise. First, if the firms in each region produce homogeneous goods the national authority merges the two local public firms when the goods are complements, independent in demand and weak substitutes. Second, if the firms in each region produce heterogeneous goods the national authority merges the two local public firms only when the goods are close complements. Therefore, there is greater scope for mergers in the former case than in the later.     

Delegation in a mixed oligopoly: the case of multiple private firms

Previous research examining mixed duopolies shows that the use of an optimal incentive contract for the public firm increases welfare and that privatization reduces welfare. We demonstrate that these results do not generalize to a mixed oligopoly with multiple private firms. We derive the optimal incentive contract for a public firm that weighs both profit and welfare and show that its use may either increase or decrease welfare depending on the number of private firms and the exact nature of costs. We also identify the conditions that determine whether or not privatizing the public firm facing an optimal incentive contract reduces welfare. Copyright © 2008 John Wiley & Sons, Ltd.     

Growth and fluctuations: The role of public dividends and public spending

In this paper, we consider a discrete-time version of the endogenous growth model developed by Barro [Barro, R.J., 1990. Government spending in a simple model of endogenous growth. Journal of Political Economy 98, 103–125], but augmented in order to envisage a public participation in the production of private goods. Public dividends are invested in order to provide a public good; in turn, the public good plays a role of indispensable production externality and, eventually, of growth engine.For what concerns the production of private goods, we find that an optimal policy is always based on a positive participation of the government as shareholder; also, when growth is slow, a public intervention or large substitution effects stabilize the economy.A right mix of short-run services and long-run infrastructures is suggested in slow economies to rule out expectation-driven fluctuations. Infrastructures are mainly recommended in presence of moderate income effects, while services are recommended in presence of strong income effects.     

Regulation of road accident externalities when insurance companies have market power

Accident externalities that individual drivers impose on one another via their presence on the road are among the most important external costs of road transport. We study the regulation of these externalities when insurance companies have market power. Some of the results we derive have close resemblance to the earlier literature on externality regulation with market power in aviation and private roads, but there are important differences, too. Using analytical models, we compare the first-best public welfare-maximizing outcome with a private profit-maximizing monopoly, and oligopoly. We find that insurance companies will internalize some of the externalities, depending on their degree of market power. We derive optimal insurance premiums, and regular parametric taxes as well as “manipulable” ones that make the companies set socially optimal premiums. The latter take into account that the firm tries to exploit knowledge of the tax rule applied by the government. Finally, we also study the taxation of road users rather than that of firms.     

Mixed oligopoly, foreign firms, and location choice

We investigate a mixed market in which a state-owned, welfare-maximizing public firm competes against n domestic private firms and m foreign private firms which are all profit-maximizing. A circular city model with quantity-setting competition is employed. We find that the equilibrium location pattern depends on m. All private firms agglomerate in the unique equilibrium if m is zero or one. Two foreign firms induce differentiation between domestic and foreign private firms. More than two foreign firms yield differentiation among the foreign firms. Regardless of n and m, agglomeration of all domestic private firms appears in equilibrium. We provide several conditions in which eliminating the public firm from the market enhances social welfare. We extend the basic model and investigate three issues concerning multiple public firms, inefficiency of the public firm, and entries by private firms. We obtain some additional implications of welfare and equilibrium locations.     

Environmental R&D and privatization in a mixed duopoly market

The study examines strategic environmental research and development (ER&D) under environmental tax in a mixed duopoly and further analyzes the impact of privatization on it. We show that the environmental tax may not necessarily promote the private (or public) firm's ER&D, and the relative ER&D performance between firms depends on the public firm's environmental attitudes and the tax rate. When the public firm cares much for environment, it can be used as an instrument to correct the private firm's underinvestment (or overinvestment) in ER&D. Moreover, privatization can (cannot) raise both firms' ER&D simultaneously if the tax rate is high (low).     

Mixed Duopoly with Subcontracting

Existing literature on mixed oligopoly focuses on competition among different types of firms but ignores their possible cooperation. We allow cooperation between a public firm and a private firm through subcontracting in a Hotelling mixed‐duopoly model. We find that when subcontracting is possible, the equilibrium without subcontracting is not socially optimal because subcontracting can lower total production costs. And if both firms engage in subcontracting, the existence of a public firm can guarantee the first best equilibrium, whether it is the low‐cost firm or not. But when a private firm is the low‐cost firm, it is more profitable for it to choose vertical foreclosure. And the consequent equilibrium is not socially desirable anymore. Copyright © 2014 John Wiley & Sons, Ltd.     

How Governments Promote Monopolies: Public Procurement in India

Government officials exert tremendous power when they buy goods and services from private companies. By setting the terms and conditions under which public procurement takes place, public officials help determine which companies will thrive and which ones will fail. This is one of the important ways governments help create and sustain monopolies in the private sector. But since the bidding process to sell products or services to the government is supposed to be an open and fair competition, how does it become skewed toward businesses that already dominate markets? We examine a particular source of bias: the eligibility criteria for bidding in public procurement tenders. These criteria often allow a few large, private companies to bid on government contracts, but they exclude a large number of small and medium‐sized enterprises. We study the terms by which offers are solicited in India through tenders floated for transportation projects: roads, highways, bridges, and civil construction. We find that the eligibility criteria impose an unnecessarily heavy burden on small firms, potentially knocking them out of the competition and discouraging them from participating in other procurement processes. In this way, the process reinforces monopolies instead of breaking them up. While this study focuses on India, the results also apply to similar economies.     

Welfare impacts of a non-profit firm in mixed commercial markets

Utilizing a model that allows for the welfare of the commercial NPO’s stakeholders directly in terms of their consumer surplus, and indirectly in terms of NPO profits, we explore the impact of changes in the NPO’s “social concern” for consumers on market efficiency. Three separate Cournot mixed market scenarios are analyzed: competition between the NPO and a private for-profit firm, competition between the NPO and a public firm, and a market scenario that includes all three firms. We find that the technical efficiency of the NPO vis-à-vis the profit maximizer is crucial in determining whether social welfare rises or falls as the NPO places more weight on their stakeholders’ surplus. In particular, if the NPO is less technically efficient than the profit maximizer or public firm, somewhat paradoxically social welfare may fall as the NPO shows a greater social concern for consumers. In other words, a movement away from pure profit maximizing behavior by a NPO may well be detrimental in these mixed commercial markets. We also show the additional sources of revenue available to a NPO may decrease the overall welfare in these mixed market situations.     

Complexity results for the weak axiom of revealed preference for collective consumption models

The purpose of this paper is to establish the complexity of alternative versions of the weak axiom of revealed preference (warp) for collective consumption models. In contrast to the unitary consumption model, these collective models explicitly take the multi-member nature of the household into account. We consider the three collective settings that are most often considered in the literature. We start with the private setting in which all goods are privately consumed by the household members. Next, we consider the public setting in which all goods are publicly consumed inside the household. Finally, we also consider the general setting where no information on the (private or public) nature of goods consumed in the household is available. We prove that the collective version of warp is np-hard to test for both the private and public settings. Surprisingly, we also find for the general setting that the collective version of warp is easy to test for two-member households.     

Restructuring the Australian State

Since the election of the Hawke Labor government in 1983 the Australian state has undergone a process of restructuring that has affected all levels of government We examine the key features of this process, including the restructuring of the public service, privatization and marketization, market liberalization and National Competition Policy We find that successive federal governments, both Labor and Coalition, have followed a model of change dominated by neo-liberal assumptions about the innate superiority of the private sector and the desirability of opening. Australian markets to the vagaries of a globalizing economic system Profitable public sector assets have been broken up and transferred to the private sector. While this process was marketed in terms of the efficiency benefits to be derived from vigorous competition, the privatized assets are already being reaggregated into what is likely to become an oligopolistic utilities market.     

Selling to Socially Responsible Consumers: Competition and The Private Provision of Public Goods

We model firms as competing for socially responsible consumers by linking the provision of a public good (environmentally friendly or socially responsible activities) to sales of their private goods. In many cases, too little of the public good is provided, but under certain conditions, competition leads to excessive provision. Further, there is generally a trade-off between more efficient provision of the private and the public good. Our results indicate that the level of private provision of the public good varies inversely with the competitiveness of the private-good market and that the types of public goods provided are biased toward those for which consumers have high participation value.     

Price and Quantity Contracts in a Mixed Duopoly with a Socially Concerned Firm

I study the endogenous choice of a price or quantity contract in a mixed duopoly with a socially concerned firm, which maximizes a combination of profit and consumer welfare. Equilibria with price and quantity contracts might co‐exist; welfare under price competition might be lower than under quantity competition; the firms' profit ranking might be different from that of a private duopoly or mixed duopoly with a public firm. Hence, if a firm follows a social strategy, the optimal market strategy crucially depends on the levels of social concern and competition in the market. The presence of socially concerned firms may change the mode of competition. Copyright © 2014 John Wiley & Sons, Ltd.     

The government wage bill and private activity

We estimate the macroeconomic effects of public wage expenditures in U.S. data by identifying shocks to public employment and public wages using sign restrictions. We find that public employment shocks are mildly expansionary at the federal level and strongly expansionary at the state and local level by crowding in private consumption and increasing labor force participation and private sector employment. Similarly, state and local government wage shocks lead to increases in consumption and output, while shocks to federal government wages induce significant contractionary effects. In a stylized DSGE model we show that the degree of complementarity between public and private goods in the consumption bundle is key for explaining the observed heterogeneity.     

Switching to Green: The Timing of Socially Responsible Innovation

We develop a timing game for adopting a product technology that features a public good. We investigate the effects of the degree of product market competition, product differentiation, the private benefits from contributing to the public good, and firm asymmetries on the timing of adoption. We then examine the effects of consumer subsidies on equilibrium timings and the proliferation of the public good.     

The Social Provision of Punishment and Incarceration

Standard economic theory proposes that public goods (equally available to everyone) will be underprovided by private markets. Individuals can benefit without having to pay, so there is little incentive to invest or manage resources efficiently. The punishment of criminals is an example of this, since everyone in a society benefits from reduced crime whether they pay to apprehend criminals or not. On that basis, it is widely presumed that governments must provide criminal justice services, including prisons. But the evidence in favor of that view is ambiguous. Stateless societies throughout history have found ways to maintain public order without ever building a prison. Nations with adequate social safety nets and a high degree of equality are also likely to rely on alternatives to incarceration. Strong forms of public goods theory, when applied to punishments and prisons, are shown to be false, since crime control does exist without a centralized state. Furthermore, the available evidence suggests that centralized government provision and management can also suffer inefficiencies from overproduction. Only comparative institutional analysis can speak to the efficiency potentials of punishment, wherein the costs of underproduction are assessed against the likely consequences of overproduction.     

Pricing Experience Goods: The Effects of Customer Recognition and Commitment

In a two‐period model of nondurable experience goods, we compare the profit and social welfare effects of behavior‐based price discrimination (BBPD) and price commitment (PC) (relative to time‐consistent pricing) in a monopoly. We find that when the static, full‐information monopoly price is higher (lower) than the mean consumer valuation, PC yields higher (lower) profits and social welfare than BBPD. We also identify the market conditions under which BBPD does not increase firm profits and provide an explanation as to when the firm should discriminate against its first‐time and repeat customers, respectively.     

Privatization, Competition, and Budget Constraints: Disciplining Enterprises in Russia

We investigate whether privatization, competitive forces, and the hardening of budget constraints played efficiency-enhancing roles in Russia in the immediate post-privatization period. We find evidence of a positive impact of privatization on labor productivity: a 10% point increase in private share ownership raises real sales per employee by 3–5%. The evidence on product market competition is weaker, depending on model specification. Soft budget constraints are usually found to reduce restructuring but the effect is small and insignificant. We find that in terms of their impacts on productivity, privatization and subsidy reduction are substitutes; privatization and competition (measured as the geographic scope of markets) are complements; and that competition and subsidy reduction are independent. This revised version was published online in August 2006 with corrections to the Cover Date.