Taxing emissions and privatizing a state‐owned enterprise under endogenous price‐quantity competition

This study considers an endogenous competition mode between price and quantity and explores policy interaction between emission tax and privatization when a vertically integrated state‐owned enterprise competes with a downstream firm that purchases inputs from an upstream supplier in its supply chain. We find that when the product substitutability is low (high), firms choose Bertrand (price‐quantity) competition under a nationalization regime, whereas they choose quantity‐price (Cournot) competition under a privatization regime. We demonstrate that an institutional change with privatization and emission tax could switch market competition mode from aggressive Bertrand (price‐quantity) to conservative Cournot competition if (unless) the product substitutability is intermediate, which leads to improved (reduced) welfare. Our findings suggest that appropriate coordination between privatization and environmental policies in a vertical relation can enhance welfare in an era of environmental transition.