Abstract

http://ssrn.com/abstract=2235358
 


 



Privatization, Underpricing and Welfare in the Presence of Foreign Competition


Arghya Ghosh


University of New South Wales - Australian School of Business - School of Economics

Manipushpak Mitra


Indian Statistical Institute, Kolkata

Bibhas Saha


University of East Anglia (UEA) - School of Economic and Social Studies

February 22, 2013

UNSW Australian School of Business Research Paper No. 2013ECON03

Abstract:     
We analyze privatization in a differentiated oligopoly setting with a domestic public firm and foreign profit-maximizing firms. In particular, we examine pricing below marginal cost by public firm, the optimal degree of privatization and, the relationship between privatization and foreign ownership restrictions. When market structure is exogenous, partial privatization of the public firm improves welfare by reducing public sector losses. Surprisingly, even at the optimal level of privatization, the public firm's price lies strictly below marginal cost, resulting in losses. Our analysis also reveals a potential conflict between privatization and investment liberalization (i.e., relaxing restrictions on foreign ownership) in the short run. With endogenous market structure (i.e., free entry of foreign firms), partial privatization improves welfare through an additional channel: more foreign varieties. Furthermore, at the optimal level of privatization, the public firm's price lies strictly above marginal cost and it earns positive profits.

Number of Pages in PDF File: 26

Keywords: privatization, welfare, underpricing, foreign firms, free entry

JEL Classification: L33, F12, D43

working papers series


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Date posted: April 3, 2013  

Suggested Citation

Ghosh, Arghya and Mitra, Manipushpak and Saha, Bibhas, Privatization, Underpricing and Welfare in the Presence of Foreign Competition (February 22, 2013). UNSW Australian School of Business Research Paper No. 2013ECON03. Available at SSRN: http://ssrn.com/abstract=2235358 or http://dx.doi.org/10.2139/ssrn.2235358

Contact Information

Arghya Ghosh (Contact Author)
University of New South Wales - Australian School of Business - School of Economics ( email )
High Street
Sydney, NSW 2052
Australia
Manipushpak Mitra
Indian Statistical Institute, Kolkata ( email )
203 B.T. Road
Kolkata, West Bengal 700108
India
Bibhas C. Saha
University of East Anglia (UEA) - School of Economic and Social Studies ( email )
Norwich, Norfolk NR4 7TJ
United Kingdom
+44 0 1603 593404 (Phone)
+44 0 1603 456259 (Fax)
HOME PAGE: http://www.uea.ac.uk/eco/people/saha_b.htm
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