Quality Rivalry in an Industry Composed of Private and Public Firms under Privatization

Yasunori Ishii

doi:10.4236/jss.2018.67003

Abstract

Modeling a duopoly in which a private firm and a public firm endogenously decide their product qualities and outputs under a privatization policy of a public firm by government, we analyze relationships between the privatization degree of the public firm and firms’ product quality choices. For establishing a more actual model we adopt more generalized demand functions including firms’ product qualities as variables. We find that a rise in the privatization degree of the public firm lowers the public firm’s product quality, whilst it raises the private firm’s one. We also show that the product quality of the public firm is not always inferior to that of the private firm, depending on their production and product quality technologies. Furthermore, we demonstrate that when the firms’ production and product quality technologies are identical to each other, the product quality of the public firm is always superior to that of the private firm.

Highlights

Since the privatization of public firms became one of the central movements for economic reform, many articles have analyzed how such a movement has affected firms’ optimal choices and social welfare in many industries composed of private and public firms
We show that the product quality of the public firm is not always inferior to that of the private firm, depending on their production and product quality technologies
We paraphrase (10) as the following proposition concerning with the industry organization of a quality-choosing duopoly composed of private and public firms: Proposition 2: Given the firms’ product qualities, a rise in the privatization degree of the public firm increases the output of the private firm and decreases that of the public firm, while it reduces the total output of the quality-choosing industry, and vice versa

Summary

Introduction

Since the privatization of public firms became one of the central movements for economic reform, many articles have analyzed how such a movement has affected firms’ optimal choices and social welfare in many industries composed of private and public firms. By adopting a more generalized demand function that is derived, we first model a duopoly, in which a private firm and a public firm choose competitively their product qualities as well as outputs endogenously.

Model and Assumptions

Output Choices in the Second Stage

Quality Decisions in the First Stage

The Effects of Privatization on Firms’ Product Qualities

Privatization and Firms’ Product Qualities

Concluding Remarks