It is well known that huge privatization programmes are currently underway in Central and Eastern Europe and in the former Soviet republics. Extensive privatization was undertaken in the UK in the 1980s and in Chile in the 1970s. France has already privatized 4 of the 21 companies on the list of those to be sold to the private sector, and the proceeds of the total sales are estimated to be around $4 billion. In Discussion Paper No. 1136, Simon Anderson, André de Palma and Research Fellow Jacques-François Thisse study only one aspect of the problem of privatization. To keep things simple they focus on efficiency effects in an `ideal' case where there is a single public firm in an industry competing with private firms that offer differentiated products. The important question is what happens when the public firm is privatized.

The authors show that 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.

Privatization and Efficiency in a Differentiated Industry
Simon P Anderson, André de Palma and Jacques-François Thisse

Discussion Paper No. 1136, March 1995 (IO)