Bargaining and market decisions of state enterprises in a transition economy

Abstract

This paper proposes that while marketization of centrally planned economies (CPEs) subjects state enterprises to market competition, it also releases to them market power that has been reined under the traditional planning regime. The paper also points out that market manipulation by state firms is facilitated by residual practices of central planning, namely, administrative allocation and bargaining. The model shows that in a hybrid economy evolving from a CPE, state firms will excessively engage in unproductive bargaining with state agencies and reduce production. This analysis helps to explain persistent shortages in spite of price increases and widespread economic crimes experienced by most reforming CPEs.