Optimal privatization policy in the presence of network externalities

Chia-Chi Wang and Jiunn-Rong Chiou

Oxford Economic Papers, 2015, vol. 67, issue 2, 514-527

Abstract: This article explores the optimal privatization policy for industries with network externalities in consumption, such as the telecommunications industry. The optimal degree of privatization depends crucially on the scale of network externality, the degree of compatibility (which, in the telecommunications industry, corresponds to the level of standardization that facilitates compatibility across different networks), and the cost type. A positive network externality will decrease the optimal degree of privatization, providing the rate of increase of marginal cost remains below a threshold. The impact of compatibility on optimal privatization is less straightforward. For instance, if the scale of network externality is low, a higher compatibility will increase optimal privatization if the rate of increase in marginal cost is also low. However, given a high network externality, optimal privatization initially increases, but then decreases as compatibility increases. Furthermore, optimal privatization with complete incompatibility may even be lower than that with complete compatibility.

Date: 2015
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