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Strategic Privatization and Regulation Policy in Mixed Markets

Jean Hindriks () and Denis Claude ()

The IUP Journal of Managerial Economics, 2006, vol. IV, issue 1, 7-26

Abstract: In this article, the authors consider mixed oligopoly markets for differentiated goods, where private and public firms compete either in price or quantity. This is a study of the welfare effect of privatization— interpreted as partial strategic delegation of the public firm to a private manager with profit concern. It is shown that partial privatization improves welfare with ‘quantity competition’ when goods are substitutes; and with ‘price competition’ when goods are complements. However, full privatization (complete delegation to private manager) can never be optimal. It is also shown that a public firm can make more profit than a private firm in equilibrium, and that this possibility is more likely under quantity competition. With regard to market regulation policy, it is articulated that (i) public and private firms should be taxed in the same manner; and (ii) price regulation is better than quantity regulation.

Date: 2006
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