Public Enterprise Strategies in a Market Open to Domestic and International Competition

Abstract

The emerging literature on interaction between strategic trade theory and mixed oligopoly uses a simple example to argue that if the domestic market is open to foreign competition and the government uses a production subsidy then it is socially preferable to pri- vatise the domestic public enterprise even if it is just as efficient as its private counterparts. This study evaluates the robustness of this result by extending it to a general framework. Furthermore, it argues that allocative efficiency gains attributed to privatisation may also be explained by giving the public enterprise a first mover advantage (as a Stackelberg leader). Thus it suggests it is the timing of the game rather than the ownership structure which is responsible for the inefficiency associated with the presence of a public enterprise in a market open to international competition.