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This paper examines the optimal privatization policy in vertically related markets in which an upstream public firm competes with a foreign private rival in supplying a produced input to the domestic and foreign downstream firms competing in the domestic market. It shows that if the upstream public firm's market share is sufficiently high, full nationalization is optimal and the resulting profit margin is positive. However, complete privatization is never optimal. Numerical simulations reveal both the diverse optimal privatization regimes and the patterns of optimal privatization levels with varying numbers of the domestic and foreign downstream firms.

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The objective of this paper is to nd the signi cant factors that crucially affect a rm's optimal transfer pricing policy. To achieve such a goal, it suf ces to examine three minimalist vertical modelsthe rst one contains a vertically integrated monopoly in both input and output markets, the second one consists of a vertically integrated rm that monopolizes an intermediate input for its own and rival's downstream divisions and the third one comprises two vertically integrated rms competing in a nal goods market. Four modes of competition are considered-Cournot, Bertrand, Stackelberg quantity and Stackelberg price. The paper shows that the optimal transfer pricing policy depends on four speci cations-the vertical structure, the production technology, the demand characteristics and the competition mode. It nds numerous patterns on optimal transfer pricing: for example, under the same demand structure and competition mode, the two vertical models can yield diametrically opposite transfer pricing strategies; within a given vertical model, different competition modes may yield the same or different optimal strategies; and within a given competition mode, the four possible pairings of ordinary substitutes/complements on the demand side and strategic substitutes/complements on the rm side can also produce quite different results. In addition, the paper illustrates how the optimal transfer pricing policy is affected when the additional factors of income tax and tariff distortions are considered. With all the signi cant factors affecting the optimal transfer pricing delineated, the paper has laid a foundation for further studies in transfer pricing under more general structures. An important implication of our results is that the optimal transfer pricing policy may not be simply determined by the common practice of shifting pro ts from high-to low-tax jurisdictions.