Market Concentration, Privatization Policies, and Heterogeneity among Private Firms in Mixed Oligopolies

Mixed oligopolies are characterized by the coexistence of private and public enterprises. The literature on mixed oligopolies indicates that, assuming all private firms are identical, the optimal degree of privatization increases with the number of private firms. In other words, the more concentrated the market is, the more the government should privatize public firms. We revisit this problem by introducing cost-heterogeneity among private firms. We show that under the assumption of constant marginal costs, a new entry by a private firm will not reduce the optimal degree of privatization, regardless of the cost differences among private firms. However, under the assumption of increasing marginal costs, we show that a new entry will reduce the optimal degree of privatization when the new entrant is significantly less efficient than the private firms already present. Our results imply that the relationship between competition and privatization policies are more complicated than the literature suggests, and they depend on the cost structure of private firms.