Downstream Subsidization and Upstream Privatization with a Vertically Integrated Foreign Firm

Chuyuan Zhang and Sang-Ho Lee

MPRA Paper from University Library of Munich, Germany

Abstract: This study constructs a model with a vertical structure in which a state-owned enterprise (SOE) in an upstream market and a private firm in a downstream market compete with a vertically integrated foreign firm (VIFF). Given a cost-inefficient SOE, we examine the strategic entry decision of a VIFF that can enter either the upstream, or the downstream market, or both, under downstream subsidization and upstream privatization policies. We find that when the government implements a subsidy policy, the VIFF enters only the downstream market if the cost inefficiency is low and enters both markets otherwise; however, the social welfare of the later is always higher than that of the former. We also find that reducing the cost inefficiency might cause welfare loss when ex-ante inefficiency is intermediate, below which the VIFF might change its entry decision. Finally, we show that an upstream privatization policy reduces welfare either when the cost inefficiency ex-post privatization decreases to a lesser degree or when the ex-ante inefficiency is relatively low.

Keywords: Downstream; Subsidization; ·; Upstream; Privatization; ·; Vertically; Integrated; Foreign; Firm; ·; Cost; Inefficiency; ·; Entry; Decision; ·; Mixed; Market (search for similar items in EconPapers)
JEL-codes: D43 H21 L13 (search for similar items in EconPapers)
Date: 2021-06
New Economics Papers: this item is included in nep-com, nep-ind, nep-mic and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:108193

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