Privatization, foreign competition, and social efficiency of free entry

Abstract

This paper examines privatization policy and entry regulation in a mixed oligopoly market with foreign competitors and free entry of domestic private firms. We demonstrate that if the number of domestic private firms is small, an import subsidy may be chosen and the optimal privatization policy is full privatization. However, if the number of domestic private firms is large, an import tariff is imposed and the optimal privatization policy is partial privatization. We also show that the long-run degree of privatization is larger than the short-run one, and the long-run tariff rate is smaller than the short-run tariff if and only if the entry cost of domestic private firms is sufficiently low. Furthermore, as long as the entry cost is relatively lower, domestic entry is socially excessive whether it is free trade or the domestic government imposes the tariff policy.