Infrastructure privatization analysis: A public-private duopoly game

Abstract

Infrastructure privatization leads to the coexistence of public and private sectors in one system. This paper contributes to the body of knowledge by elaborating a public-private duopoly game to address three critical questions arising from the privatization. First, how will the privatization shape the quality and pricing decisions by both the public and private sectors? Second, to what extent should the infrastructure or service be privatized and how much should the royalty payment be? Third, how will the efficiency of private sector affect the privatization arrangement? The results suggest that with increasing capacity allocated to the private sector, the private sector charges a higher price and maintains a higher level of quality, while the public sector chooses a higher price but a lower level of quality. The optimal capacity released to the private sector is a function of its efficiency, and the royalty payment increases sharply as the private sector gains more capacity. The analyses reveal the coupled effects of capacity allocation and private efficiency on the quality and pricing decisions, as well as the royalty payments and private profits. A set of capacity-efficiency frontiers are found, beyond which the public-private duopoly performs better than the non-privatization.