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Strategic behaviors on privatization between regions

  • Economic Analysis of Law, Politics, and Regions
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Abstract

In this paper, focusing on the policy initiatives between the central government and local governments, we analyze the privatization policies in a mixed oligopoly model composed of two regions. The main results are as follows. First, in the case of centralized regime, partial privatization is socially desirable if the substitutability between goods is relatively high; if not, full nationalization is socially desirable. In the case of decentralized regime, local governments take partial privatization in the equilibrium irrespective of substitutability. However, the local governments tend to lower the partial privatization rate of public firms as the substitutability between goods increases. Second, the central government is more (resp. less) aggressive for privatization than the local governments when the substitutability is higher (resp. lower) than the critical level. This shows that the argument in Han and Ogawa (FinanzArchiv Public Financ Anal 64(3):352–363, 2008) is justifiable under certain conditions. Finally, decentralization brings forth an increase (resp. a decrease) in market size and consumer surplus if the substitutability is higher (resp. lower) than the critical level. However, the social welfare necessarily decreases by the decentralization for any levels of substitutability.

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Notes

  1. Many previous studies on mixed oligopoly have considered that public firms are owned by central governments which maximize the social welfare of their countries. But there are many sectors where firms are owned by local governments that are concerned only for the social welfare of their regions: the broadcasting market (Bel and Domènech 2009), hospital markets (Aiura 2013), the university system (De Fraja and Valbonesi 2012), the development of public facilities (Takahashi 2004), etc.

  2. Because \(\frac{{\partial^{2} W_{H} }}{{\partial \theta^{2} }} = - \frac{{48a^{2} b\left\{ {15(\theta - 6) + 2b(84 + 55\theta ) + b^{2} (174 + 115\theta ) + 4b^{3} (6 + 5\theta )} \right\}}}{{\left\{ {5(\theta - 6) + b(5\theta - 12)} \right\}^{4} }} < 0\), the second order condition is also satisfied if \({{(\sqrt {601} - 19)} \mathord{\left/ {\vphantom {{(\sqrt {601} - 19)} 8}} \right. \kern-0pt} 8} < b \le 1\).

  3. We set a = 50, θk = 0.5.

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Author information

Authors and Affiliations

  1. Department of Economics and Finance, Keimyung University, Daegu, South Korea

    Woohyung Lee

  2. Department of International Commerce, Keimyung University, Daegu, South Korea

    Ki-Dong Lee

Authors
  1. Woohyung Lee
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  2. Ki-Dong Lee
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Correspondence to Woohyung Lee.

Appendix

Appendix

With respect to the slope function in Eq. (21), we have

$$\left[ {r_{m}^{\prime } (\theta_{k} ,b)} \right]_{b = 0}\, = \frac{{30780(6 - \theta_{k} )^{2} }}{{(3744 - 1194\theta_{k} + 95\theta_{k}^{2} )^{2} }} > 0,$$
(A.1)
$$\left[ {r_{m}^{\prime } (\theta_{k} ,b)} \right]_{b = 1} \, = \frac{{ - 3564 + 1920\theta_{k} - 125\theta_{k}^{2} }}{{(192 - 25\theta_{k} )^{2} }} < 0.$$
(A.2)

In addition, the partial derivative of the slope function with respect to b, i.e., \({{\partial r_{m}^{\prime } (\theta_{k} ,0)} \mathord{\left/ {\vphantom {{\partial r_{m}^{\prime } (\theta_{k} ,0)} {\partial b}}} \right. \kern-0pt} {\partial b}}\), is negative as in Fig. 3 in “Appendix”. This implies that the government strategies with respect to the privatization rate change from strategic complements to strategic substitute as b increases from a lower level.

Fig. 3
figure 3

The slope function of the government’s reaction curve

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Lee, W., Lee, KD. Strategic behaviors on privatization between regions. Asia-Pac J Reg Sci 2, 227–242 (2018). https://doi.org/10.1007/s41685-018-0069-1

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