Privatization in a Mixed Duopoly Model with R&D

Abstract

This paper examines a different way of privatization from existing literature. In a mixed duopoly Hotelling type model with each firm consists of multi-subsidiaries, instead of privatizing the public firm in its entirety, the government may privatize only one of the subsidiaries (for example the manufacturing subsidiary). We find that this kind of privatization always improves social welfare comparing to no privatization at all. And comparing to privatizing the public firm in its entirety, privatizing only the manufacturing subsidiary always results in larger consumer welfare and results in larger social welfare when transport cost or R\&D cost is sufficiently large.