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Privatization neutrality with quality and subsidies

Author

Listed:
  • Horn-In Kuo

    (Ming Chuan University)

  • Fu-Chuan Lai

    (National Chengchi University)

  • K. L. Glen Ueng

    (National Chengchi University)

Abstract

This study introduces a subsidy policy on product quality in a quality-then-price game to remedy the quality distortion under a mixed oligopoly (one public firm and one private firm) framework. We show that the multi-stage setting for firms is crucial for the validity of privatization neutrality. Since firms have different objectives, their asymmetric strategic consideration on price will spill over to the quality competition if there exists price differentiation in equilibrium under partial privatization. This spillover effect results in lower social welfare levels than the first-best outcome, and the neutrality of privatization in White (Economics Letters 53:189–195) no longer holds in our multi-stage model. Specifically, the optimal privatization policy is either fully public or completely private, where the social welfare attains the first-best outcome.

Suggested Citation

  • Horn-In Kuo & Fu-Chuan Lai & K. L. Glen Ueng, 2020. "Privatization neutrality with quality and subsidies," The Japanese Economic Review, Springer, vol. 71(3), pages 405-419, July.
  • Handle: RePEc:spr:jecrev:v:71:y:2020:i:3:d:10.1007_s42973-019-00022-x
    DOI: 10.1007/s42973-019-00022-x
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    References listed on IDEAS

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    Cited by:

    1. Okuyama, Suzuka, 2021. "Price and quality competition in a mixed duopoly : Differential game approach," MPRA Paper 110148, University Library of Munich, Germany, revised 06 Oct 2021.

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    More about this item

    Keywords

    Mixed oligopoly; Privatization neutrality; Quality subsidy; Multi-stage; Quality competition;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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