Optimal privatization policy with Bertrand competition

Abstract

This article endogenizes the degree of privatization under a mixed oligopoly market in which a less efficient public firm engages in price competition with a private firm. The results are substantially different from those obtained in quantity competition situations. First, the public firm's price may be lower or higher than the private firm's price. Second, privatization should not necessarily increase both firms' prices. Finally, the relationship between the optimal degree of privatization and the efficiency of the public firm is nonmonotonic. Hence, the optimal privatization policy in price competition situation is not always partial privatization; it might also be full privatization or full nationalization.