Strategic Trade and Privatization Policies in Bilateral Mixed Markets

We consider strategic trade and privatization policies in international bilateral mixed markets where a domestic state-owned enterprise competes with both domestic and foreign private enterprises in each country. We examine the strategic interaction of two countries’ optimal choices of privatization and trade policies with different combinations of production subsidy and import tariff, and find some interesting policy implications. First, a higher social welfare can be achieved with the appropriate degree of privatization when both governments adopt a production subsidy only. Second, FTA can work as a coordination device to solve the prisoner’s dilemma problem. Third, the maximum-revenue privatization, combined with zero subsidy and higher tariff, is higher than optimum-welfare privatization. Finally, the international bilateral equilibrium needs less degree of privatization and lower subsidy rate, even though it is jointly suboptimal from the viewpoint of global welfare