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Optimal privatization policy in the presence of network externalities

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  • Chia-Chi Wang
  • Jiunn-Rong Chiou

Abstract

This article explores the optimal privatization policy for industries with network externalities in consumption, such as the telecommunications industry. The optimal degree of privatization depends crucially on the scale of network externality, the degree of compatibility (which, in the telecommunications industry, corresponds to the level of standardization that facilitates compatibility across different networks), and the cost type. A positive network externality will decrease the optimal degree of privatization, providing the rate of increase of marginal cost remains below a threshold. The impact of compatibility on optimal privatization is less straightforward. For instance, if the scale of network externality is low, a higher compatibility will increase optimal privatization if the rate of increase in marginal cost is also low. However, given a high network externality, optimal privatization initially increases, but then decreases as compatibility increases. Furthermore, optimal privatization with complete incompatibility may even be lower than that with complete compatibility.

Suggested Citation

  • Chia-Chi Wang & Jiunn-Rong Chiou, 2015. "Optimal privatization policy in the presence of network externalities," Oxford Economic Papers, Oxford University Press, vol. 67(2), pages 514-527.
    • Handle: RePEc:oup:oxecpp:v:67:y:2015:i:2:p:514-527.
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    File URL: http://hdl.handle.net/10.1093/oep/gpu030
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    Cited by:

    1. Qidi Zhang & Leonard F.S. Wang & Yapo Yang, 2020. "Indirect taxation with shadow cost of public funds in mixed oligopoly," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(3), pages 415-425, April.
    2. Paul, Arindam & De, Parikshit, 2022. "Reversal of Bertrand-Cournot Ranking for Optimal Privatization Level," MPRA Paper 116272, University Library of Munich, Germany, revised 10 Feb 2023.
    3. Wang, Chia-Chi & Chiou, Jiunn-Rong, 2018. "Optimal privatization policy with Bertrand competition," International Review of Economics & Finance, Elsevier, vol. 56(C), pages 538-546.
    4. Xia Wang & Tingting Tan & Mingqing Xing, 2022. "Environmental awareness of the private firm and optimal privatization in a mixed duopoly," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(8), pages 4055-4063, December.

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