Strategic privatization and regulation policy in mixed markets

In this paper we consider mixed oligopoly markets for differentiated goods where private and public firms compete either in prices or quantities. We then study the welfare effect of privatization interpreted as partial strategic delegation of the public firm to a private manager with profit concern. It is shown that partial privatization improves welfare with quantity competition when goods are substitutes, and with price competition when goods are complements. However full privatization (complete delegation to private manager) can never be optimal. It is also shown that the public firm can make more profit than the private firm in equilibrium, and that this possibility is more likely under quantity competition. Turning to market regulation policy, we find: (i) that public and private firms should be taxed the same; and (ii) that price regulation is better than quantity regulation