Competition and privatization policies revisited: the payoff interdependence approach

We investigate the relationship between competition and privatization policies. Existing studies measure the strength of competition based on the number of firms, and show that the optimal degree of privatization is higher in more competitive markets. We introduce an interdependent payoff structure into a mixed oligopoly and revisit this problem. Here, we assume that firms consider their own and other firms' profits. In the model, competition increases when firms are negatively affected by rivals' profits. We find that under the assumption of quadratic production costs, which is popular in mixed oligopolies, the optimal degree of privatization is higher when there is less market competition. This finding contrasts with those of prior studies. However, this result may be reversed when we adopt alternative model formulation. Furthermore, in the constant marginal cost case, the optimal degree of privatization is always lower when there is less market competition, which is opposite to the result in the quadratic cost case. Our results suggest that the relationship between an optimal privatization policy and the strength of competition crucially depends on the market structure, including the cost conditions.