Privatization and innovation in a vertical structure

Xiaoting Wu, Arijit Mukherjee and Chenhang Zeng

China Economic Review, 2024, vol. 84, issue C

Abstract: We investigate how upstream privatization affects downstream R&D investments and social welfare in a vertically-related industry with an upstream monopolistic firm and two downstream firms. One of the downstream firms can undertake R&D investments to reduce input coefficient. We examine two cases: private upstream monopoly versus public upstream monopoly, and show that the presence of a public upstream firm might reduce the downstream firm's motivation to invest in R&D. Compared to upstream nationalization, upstream privatization could lead to higher consumer surplus and social welfare, especially when the R&D process is significantly efficient. We further extend our analysis in three directions to show the implications of technology spillovers, upstream competition and downstream R&D competition. We show that our main results hold with the presence of technology spillovers, and under a successive Cournot oligopoly involving two upstream firms. When there is downstream R&D competition, upstream privatization always hurts consumers and social welfare. Our study yields valuable insights for privatization policies.

Keywords: Vertical industry; Upstream privatization; Downstream R&D; Welfare (search for similar items in EconPapers)
JEL-codes: L12 L13 L33 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:chieco:v:84:y:2024:i:c:s1043951x24000282

DOI: 10.1016/j.chieco.2024.102139

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