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|
|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.