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Optimal Trade and Privatization Policies in an International Duopoly with Cost Asymmetry

24 Pages Posted: 9 Jan 2011  

Winston W. Chang

State University of New York at Buffalo - Department of Economics

Date Written: March 1, 2005

Abstract

This paper examines optimal trade and privatization policies in a mixed duopoly in which a pubic home firm competes with a more efficient foreign firm. The home firm is a Cournot competitor or a Stackelberg leader. The home government chooses the degree of privatization and import tariff to maximize national welfare. The paper examines the policy effects on industry equilibrium with general demand and cost structures and shows that the optimal level of privatization depends crucially upon the strategic substitutability-complementarity assumption. It further shows that if both policies are used under linear demand and quadratic costs, the equilibrium prices, firms' outputs, welfare and tariff rates are the same under Cournot and Stackelberg competition, and price equals the home firm's marginal cost. Neither full nationalization nor full privatization is optimal under Cournot, but full nationalization is always optimal under Stackelberg competition. If only one policy is used, a reduction in government's ownership of the public firm under Cournot competition and constant marginal costs calls for a higher optimal tariff rate. This result does not carry over to the case of increasing marginal costs, although the optimal tariff is lower under full nationalization than under full privatization.

Keywords: privatization, tariff, mixed duopoly, cost asymmetry

JEL Classification: F13, L33

Suggested Citation

Chang, Winston W., Optimal Trade and Privatization Policies in an International Duopoly with Cost Asymmetry (March 1, 2005). Journal of International Trade and Economic Development, Vol. 14, No. 1, pp. 19-42, March 2005. Available at SSRN: https://ssrn.com/abstract=1736740

Winston W. Chang (Contact Author)

State University of New York at Buffalo - Department of Economics ( email )

453 Fronczak Hall
Department of Economics, SUNY at Buffalo
Buffalo, NY 14260
United States
716-645-8671 (Phone)
716-645-2127 (Fax)

HOME PAGE: http://economics.buffalo.edu/facultyprofiles/winston-chang/

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