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The optimal privatization policy with price competition

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Working paper

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 This paper investigates the price competition in a mixed oligopoly which consists of one public firm and one private firm. The two stage games are considered. In stage 1, the government chooses the optimal degree of privatization. In stage 2, firms are engage in Cournot competition. Three interesting results are obtained in this paper. First, the public firm¡¦s price is not necessarily lower than the private firm¡¦s; it can even be higher. Second, in the popular view, privatization will increase the public firm¡¦s price. However, we find that privatization should not necessary increase the public firm¡¦s price. As the public firm¡¦s cost is high enough, privatization will make the public firm lower price. Third, we show that the less efficient the public firm is, the less the one needs to be privatized.

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