This paper investigates the effects of privatization in the presence of strategic trade policies within an international mixed oligopoly serving a single market. If the government uses a domestic production subsidy, then welfare is always increased with privatization, while the optimal subsidy falls. If the government uses an import tariff, privatization increases welfare over much of the parameter space. The optimal tariff, however, may rise or fall. In recent years, many countries around the world are privatizing their state-owned industries. At the same time, many of these countries are also showing remarkable changes in their economic policies toward international trade. On many occasions, tariffs are significantly altered and domestic production subsidies are substantially reduced. For example, Russia has privatized its aircraft industry and doubled its tariff on imported aircraft. Colombia has privatized its stateowned automobile maker Colombia Automotriz and reduced the import tariffs on foreign-made cars. In Argentina, the government is pursuing a policy of selective privatization and subsequent reduction of subsidies. In Western Europe countries such as Germany and Spain have privatized their major airlines (Lufthansa and Iberia, respectively) and significantly reduced subsidies. What is the connection between privatization and strategic trade policies? Does privatization require a welfare-maximizing government to alter trade barriers? The objective of this paper is to answer these questions by investigating the interaction between privatization and strategic trade policies. The effects of privatization are typically analyzed in the context of mixed oligopoly models, where state-owned welfare-maximizing public firms interact with profit-maximizing private firms.1 We investigate the interaction between privatization and strategic trade policies by incorporating strategic trade instruments in an international mixed oligopoly model. Specifically, we consider two strategic trade instruments: an import tariff and a domestic production subsidy. The government chooses the optimal level of tariff or subsidy to maximize domestic welfare. For each trade instrument, we primarily focus on two questions. First, does privatization increase

https://www.jstor.org/stable/info/1060667

Mixed Oligopoly, Privatization, and Strategic Trade Policy

This paper examines optimal trade and privatization policies in a mixed duopoly in which a pubic home firm competes with a more efficient foreign firm. The home firm is a Cournot competitor or a Stackelberg leader. The home government chooses the degree of privatization and import tariff to maximize national welfare. The paper examines the policy effects on industry equilibrium with general demand and cost structures and shows that the optimal level of privatization depends crucially upon the strategic substitutability-complementarity assumption. It further shows that if both policies are used under linear demand and quadratic costs, the equilibrium prices, firms' outputs, welfare and tariff rates are the same under Cournot and Stackelberg competition, and price equals the home firm's marginal cost. Neither full nationalization nor full privatization is optimal under Cournot, but full nationalization is always optimal under Stackelberg competition. If only one policy is used, a reduction in government's ownership of the public firm under Cournot competition and constant marginal costs calls for a higher optimal tariff rate. This result does not carry over to the case of increasing marginal costs, although the optimal tariff is lower under full nationalization than under full privatization.

https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=1736740

Optimal Trade and Privatization Policies in an International Duopoly with Cost Asymmetry

One of the mechanisms that are implemented in the cost containment movement in the health care sectors in western countries is the definition, by the third-party payer, of a set of preferred providers. The insured patients have different access rules to such providers when ill. The rules specify the copayments patients must pay when using an out-of-plan care provider. This paper studies the competitive process among providers in terms of both prices and qualities. Competition is influenced by the status of providers as in-plan or out-of-plan care providers. Also, there is a moral hazard of provider choice related to the trade-off between freedom to choose and the need to hold down costs. It is possible to achieve the first-best allocation by an appropriate definition of the reimbursement scheme when decisions on prices and qualities are taken simultaneously (as in primary health care sectors). In contrast, some type of regulation is needed to achieve the optimal solution when decisions are sequential (as in specialized health care sectors). We also derive normative conclusions on how price controls should be implemented in some European Union member states.

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Public and Private Provision of Health Care

We investigate the sequential choice of location in a mixed duopoly, where a welfare-maximising public firm competes against a profit-maximising private firm. We examine the desirable role of the public firm in a mixed market. We also consider the effect of price regulation. We find that the public firm should become the follower (leader) if a price regulation is (is not) imposed. We also find that neither price regulation nor privatisation of the public firm improves welfare.

Mixed Duopoly with Product Differentiation: Sequential Choice of Location

Mixed oligopoly, optimal privatization, and foreign penetration☆

If a publicly-owned firm has a higher marginal cost than a private firm, partial public ownership may be welfare-improving, if the public firm acts is Stackelberg leader. If the private firm's marginal cost is private information a simple transfer function is truth-eliciting. If the stock market is efficient, the cost of renationalization is “small”.

Kenneth George

Papers

Mixed duopoly, inefficiency, and public ownership