Efficiency and Privatisation in Imperfectly Competitive Industries.

If a public firm is managed less efficiently than private producers facing similar conditions, then privatization will increase the overall efficiency of the industry and benefit society. This paper challenges this apparently innocuous conclusion. As long as the private firms' efficiency improves as a result of competition, then it will also be higher when they are subjected to "unfair" competition from a public oligopolist with no budget constraint. The author shows that it may happen that the loss inefficiency due to the relatively inefficient public firm is more than compensated by gains in the efficiency of the private firms. Copyright 1991 by Blackwell Publishing Ltd.