Privatization, Underpricing, and Welfare in the Presence of Foreign Competition

Ghosh, Arghya, Mitra, Manipushpak and Saha, Bibhas (2015) Privatization, Underpricing, and Welfare in the Presence of Foreign Competition. Journal of Public Economic Theory, 17 (3). pp. 433-460. ISSN 1097-3923

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Abstract

We analyze privatization in a differentiated oligopoly setting with a domestic public firm and foreign profit-maximizing firms. In particular, we examine pricing below marginal cost by the public firm, the optimal degree of privatization, and the relationship between privatization and foreign ownership restrictions. When market structure is exogenous, partial privatization of the public firm improves welfare by reducing public sector losses. Surprisingly, even at the optimal level of privatization, the public firm's price lies strictly below marginal cost, resulting in losses. Our analysis also reveals a potential conflict between privatization and investment liberalization (i.e., relaxing restrictions on foreign ownership) in the short run. With endogenous market structure (i.e., free entry of foreign firms), partial privatization improves welfare through an additional channel: more foreign varieties. Furthermore, at the optimal level of privatization, the public firm's price lies strictly above marginal cost and earns positive profits.

Item Type: Article
Faculty \ School: Faculty of Social Sciences > School of Economics
Depositing User: Pure Connector
Date Deposited: 06 Dec 2015 02:09
Last Modified: 17 Mar 2020 21:18
URI: https://ueaeprints.uea.ac.uk/id/eprint/55663
DOI: 10.1111/jpet.12095

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