DP1136 Privatization and Efficiency in a Differentiated Industry

Author(s): André de Palma, Jacques-François Thisse
Publication Date: March 1995
Keyword(s): Mixed Oligopoly, Privatization, Product Differentiation
JEL(s): L13, L33
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1136

We consider a market in which a public firm competes against private firms, and ask what happens when the public firm is privatized. In the short run, privatization is harmful because all prices rise; the disciplinary role of the public firm is lost. In the long run, privatization leads to further entry; the net effect is beneficial if consumer preference for variety is not too weak. A sufficient statistic for welfare to be higher in the long run, is that the public firm makes a loss. Profitable firms should not be privatized, in contrast with frequent practice.