Market Structure, Competition, and Optimal Privatization: a Linear Supply Function Approach

Abstract

We consider a mixed oligopoly, taking into account partial privatization. While early literature finds that competition intensification brings the optimal degree of privatization (ODP) close to perfect privatization, a recent study, using a payoff interdependence approach, shows that competition intensification brings ODP close to perfect nationalization. This study uses a linear supply function approach, another method of evaluating competition intensification, to examine the robustness of the results from the payoff interdependence approach. As a result, we also show that fierce competition brings ODP close to perfect nationalization. This has practical implications and serves as a warning with respect to privatization.