Privatization and Efficiency in a Differentiated Industry
We consider a market in which a public firm competes against private firms, and ask what happens when the public firm is privatized. In the short run, privatization is harmful because all prices rise; the disciplinary role of the public firm is lost. In the long run, privatization leads to further entry; the net effect is beneficial if consumer preference for variety is not too weak. A sufficient statistic for welfare to be higher in the long run, is that the public firm makes a loss. Profitable firms should not be privatized, in contrast with frequent practice.
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