Discussion paper

DP1136 Privatization and Efficiency in a Differentiated Industry

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.


Thisse, J and A de Palma (1995), ‘DP1136 Privatization and Efficiency in a Differentiated Industry‘, CEPR Discussion Paper No. 1136. CEPR Press, Paris & London. https://cepr.org/publications/dp1136