Privatization, Underpricing and Welfare in the Presence of Foreign Competition

26 Pages Posted: 3 Apr 2013  

Arghya Ghosh

UNSW Australia Business School, School of Economics

Manipushpak Mitra

Indian Statistical Institute, Kolkata

Bibhas Saha

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

Date Written: February 22, 2013

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.

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

JEL Classification: L33, F12, D43

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: https://ssrn.com/abstract=2235358 or http://dx.doi.org/10.2139/ssrn.2235358

Arghya Ghosh (Contact Author)

UNSW Australia Business School, 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

Paper statistics

Downloads
63
Rank
288,033
Abstract Views
384