Optimal Trade and Privatization Policies in an International Duopoly with Cost Asymmetry

Abstract

This paper examines optimal trade and privatization policies in a mixed duopoly in which a pubic home firm competes with a more efficient foreign firm. The home firm is a Cournot competitor or a Stackelberg leader. The home government chooses the degree of privatization and import tariff to maximize national welfare. The paper examines the policy effects on industry equilibrium with general demand and cost structures and shows that the optimal level of privatization depends crucially upon the strategic substitutability-complementarity assumption. It further shows that if both policies are used under linear demand and quadratic costs, the equilibrium prices, firms' outputs, welfare and tariff rates are the same under Cournot and Stackelberg competition, and price equals the home firm's marginal cost. Neither full nationalization nor full privatization is optimal under Cournot, but full nationalization is always optimal under Stackelberg competition. If only one policy is used, a reduction in government's ownership of the public firm under Cournot competition and constant marginal costs calls for a higher optimal tariff rate. This result does not carry over to the case of increasing marginal costs, although the optimal tariff is lower under full nationalization than under full privatization.Privatization, tariff, mixed duopoly, cost asymmetry,

Mixed Oligopoly under Demand Uncertainty

“…6 A similar cost function can also be found in Fershtman (1990), Fjell and Pal (1996), Matsumura (2003a), Chang (2004, and Matsumura and Kanda (2005). For simplicity, we ignore the fixed cost.…”

Domestic and Foreign Ownership of Private Sector in Mixed Duopoly

“…Some resent studies include foreign private firms (see, for examp le, [31][32][33][34][35][36][37][38]. These studies does not consider part ial foreign ownership of private firms.…”

Extension of Long-Staehler’s Model on Optimal Export Tax in the Case of Privatization

“…Thus, we incorporate asymmetric cost into our model. This set-up follows from Chang [3], Kamijo and Nakamura [10], and Wang and Chen [11]. Second, Long and Staehler [9] neglect the possibility of product differentiation as shown by Wang et al [12], Saha [13], and Matsumura et al [14].…”

“…Pal and White [2] showed that the presence of state-owned firms results in decreases in optimal tariffs and subsidies. Chang [3] applied a mixed duopoly model to study privatization policy and optimal import tariffs in the presence of exogenous cost asym-metry. Chao and Yu [4] argued that partial privatization increases the optimal tariff rate but foreign competition reduces it.…”