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Privatization, underpricing and welfare in the presence of foreign competition

Ghosh, A.; Mitra, M.; Saha, B.

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Authors

A. Ghosh

M. Mitra



Abstract

We analyze privatization in a differentiated oligopoly setting with a domestic public firm and foreign profit-maximizing firms. In particular, we examine pricing below marginal cost by public firm, the optimal degree of privatization and, the relationship between privatization and foreign ownership restrictions. When market structure is exogenous, partial privatization of the public firm improves welfare by reducing public sector losses. Surprisingly, even at the optimal level of privatization, the public firm's price lies strictly below marginal cost, resulting in losses. Our analysis also reveals a potential conflict between privatization and investment liberalization (i.e., relaxing restrictions on foreign ownership) in the short run. With endogenous market structure (i.e., free entry of foreign firms), partial privatization improves welfare through an additional channel: more foreign varieties. Furthermore, at the optimal level of privatization, the public firm's price lies strictly above marginal cost and it earns positive profits.

Citation

Ghosh, A., Mitra, M., & Saha, B. (2015). Privatization, underpricing and welfare in the presence of foreign competition. Journal of Public Economic Theory, 17(3), 433-460. https://doi.org/10.1111/jpet.12095

Journal Article Type Article
Acceptance Date Mar 12, 2013
Online Publication Date May 4, 2015
Publication Date Jun 1, 2015
Deposit Date Aug 7, 2014
Publicly Available Date Jun 17, 2016
Journal Journal of Public Economic Theory
Print ISSN 1097-3923
Electronic ISSN 1467-9779
Publisher Wiley
Peer Reviewed Peer Reviewed
Volume 17
Issue 3
Pages 433-460
DOI https://doi.org/10.1111/jpet.12095
Public URL https://durham-repository.worktribe.com/output/1425275

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Publisher Licence URL
http://creativecommons.org/licenses/by/4.0/

Copyright Statement
© 2013 The Authors. Journal of Public Economic Theory Published by Wiley Periodicals, Inc. This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited.





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