Efficient performance by companies with mixed ownership: Privatization and divestiture of a vertically integrated public monopoly

Abstract

This paper examines a model of privatization and divestiture of a vertically integrated public monopoly. The framework is used to derive general conditions of how mixed companies might be used to promote efficient outcomes without assuming either an ideal social planner or superior cost performance of private enterprise. The conditions suggest that efficient public policy towards mixed (public‐private partnership) companies depends on basic cost and demand conditions. The results indicate that: (1) a vertically integrated private monopoly can be more efficient than any combination of mixed companies when there is a sufficiently flat linear (elastic) demand curve and relatively greater (upward sloping) marginal cost for the downstream sector; (2) an upstream public and downstream public firm can achieve the first best outcome when the downstream firm has constant marginal costs; and (3) a partial privatization of the upstream firm achieves higher welfare than taking that action for the downstream firm. The intuition behind the propositions is provided using standard features of cost and demand. While the implications for public policy regarding privatization and divestiture in infrastructure sectors are not definitive, the results underscore the importance of understanding cost and demand conditions when developing and implementing public policies.

Entry decision of a vertically integrated foreign firm with downstream subsidization and upstream privatization

“…When the ex-ante cost inefficiency is lower than 𝑐 11 , a greater improvement in the SOE's cost efficiency is 17 Note that all the comparative outcomes are positive because .The government can prevent the foreign firm from entering the intermediate goods market under the vertical integration of firms U and D. However, the objective function ex-post integration under mixed ownership between the government (the owner of firm U) and private investors (the owner of firm D) should be developed. For more discussion on mixed ownership, see Lee and Hwang (2003) and Berg et al (2021).…”

Foreign passive ownership and tariff‐induced free technology transfer under vertical integration

“…The government can provide output subsidies to domestic firms and allow for mixed ownership between the government and private investors. For a recent discussion on the issue of ownership in a vertical structure, seeOhori (2012),Yang et al (2014),Chang and Ryu (2015),Berg et al (2021) andZhang and Lee (2022).…”