Optimal number of privatised products in a differentiated mixed oligopoly with free market entry

Abstract

AbstractThis study investigates how a privatisation policy affects long‐run market equilibrium when a public firm produces multiple products. It contributes to the literature by (a) examining the long‐run effect of a privatisation policy on a multi‐product public firm and (b) investigating whether the market is characterised by excess or insufficient entry when in long‐run equilibrium. This study assumes that there is a multi‐product public firm and potential private firm entrants that produce one product in the economy. The public firm can privatise some production sectors, the privatised firm produces only one product, and the potential entrant private firm can enter the market by incurring entry costs. The public firm decides how many sectors to privatise. The private firms enter the market if they earn non‐negative profits. The study's findings show that full nationalisation is socially preferable in the long run. In equilibrium, when the number of production sectors of the public firm is small, excess entry occurs easily; the converse is also true. The results may assist the government in determining its privatisation policy and the private sector in determining whether to enter markets that were previously monopolised by the government.