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.
The literature on mixed oligopoly presumes the competition between private firms and
public firms. Private firms maximize profits and public firms maximize welfare. The key
issue is the welfare effect of privatization. De Fraja and Delbono (1989) consider n private
firms competing with one public firm producing homogenous goods, with the same
technology involving a fixed cost and increasing marginal costs (and no capacity
constraint). Under Cournot-Nash competition, provided that the market is sufficiently
competitive (n exceeds some threshold), they show that welfare is improved if the public
firm maximizes profit instead of welfare. This is a strong argument for privatization when markets are sufficiently competitive. Cremer et al. (1989) allow for the possibility that cost
is higher in public firms (with constant marginal costs and identical fixed costs). Starting
from a market where all firms are private, they study the welfare effect of transferring firms
into public ownership (i.e., nationalization) instructing them to maximize welfare subject
to break even condition. In the short run, the fixed cost is sunk and private firms would
stay active even if they make negative profits in equilibrium but in the long run, such firms
would exit the market. They show that in the short run it is optimal to have only one public
firm (irrespective of the fixed cost) if the extra cost from public firm production is not too
high. In the long run, nationalization of one firm drives out the remaining firms and leads
to a public monopoly, which is dominated by a private monopoly due to the cost difference. |
