Working Paper: CEPR ID: DP1136
Authors: Simon P. Anderson; Andre de Palma; Jacques-Francois Thisse
Abstract: 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.
Keywords: privatization; mixed oligopoly; product differentiation
JEL Codes: L13; L33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Privatization (L33) | Higher Prices (D49) |
| Loss of Public Firm's Disciplinary Role (G38) | Higher Prices (D49) |
| Privatization (L33) | Increased Market Entry (D40) |
| Privatization (L33) | Increased Variety (L15) |
| Public Firm Making Losses (G33) | Net Benefit of Privatization (L33) |
| Consumer Preference for Variety (Strong) (D11) | Increased Market Entry (D40) |
| Privatization (of Profitable Firms) (L33) | Negative Impact on Welfare (I38) |