1. OT2010 1 Market Structure and Privatization Policy under International Competition Joint work with Yoshihiro Tomaru

2. OT2010 2 Plan of the Presentation (1) Rough Sketches of the Model and Results (2) Mixed Oligopoly (3) Four Lines of Related Literature on Mixed Oligopoly (4) Model Formulation (5) Results and Implications

3. OT2010 3 Rough sketch of the model (1) The government chooses the level of production subsidy s. (2) One welfare-maximizing state-owned public firm (firm 0) competes against n profit maximizing private firms in Cournot fashion (or Stackelberg). nθ foreign private firms, n(1-θ) domestic private firms (n and θ are exogenous)

4. OT2010 4 Our main concerns (1) Relationship among welfare-improving effect of privatization, n and θ under optimal subsidy policy. (2) What is the desirable role of the public firm, whether public leadership or private leadership yields higher welfare under optimal subsidy policy

5. OT2010 5 Results (1) Privatization more likely improves welfare when n is larger and θ is smaller. →The government should improve the competitiveness of the market before the privatization of the public firms (2) Private leadership is better when θ is small, and public leadership is better when θ is large. →The public firm should take leadership when the foreign penetration in the product market is large.

6. OT2010 6 Partial Privatization De Fraja and Delbono: The public sector holds whole shares in the firm (nationalization) or the private sector holds whole shares in the firm (privatization) In the real world, we observe many firms with mixture ownership (partial privatization) NTT, JT, Iwate Bank, Hokuriku Electric Power Company, VW, Renault

7. OT2010 7 Matsumura (1998) (1) Cournot-type (quantity-setting competition, simultaneous-move, no product differentiation) (2) No restrictions on the cost differences between public and private firms. (3) The objective function of the public firm is the weight sum of social welfare and its own profits. （ Partial Privatization) U 0 = (1-α) W+ απ 0 (4) General demand and general costs. The government chooses s and s affects α. After observing α firms compete in the product market.

8. OT2010 8 Results α =0 is optimal only if it yields public monopoly. →If we allow partial privatization, no privatization (full nationalization) never becomes optimal.

9. OT2010 9 Intuition =0. A slight reduction of (1) Suppose that α =0. A slight reduction of α reduces public firm's output q 0. Since p=c 0 ', this effect is negligible (second order) ←envelope theorem (2) Reducing α increases private firm's output q 1 Since p>c 1 ', this effect is nonnegligible (first order) ⇒ (2) dominates (1).

10. OT2010 10 Four Lines of Related Literature on Mixed Oligopoly(1) (1) Relationship between Market Structure and Privatization Policy Privatization more likely improves welfare when the market is more competitive (when the number of private firms is larger). De Fraja and Delbono (1989), Han and Ogawa (2007,2009), Matsumura and Shimizu (forthcoming) All papers ignore the subsidy policy

11. OT2010 11 Related Literature (2) (2) Desirable Role of Public Firm, whether public leadership or private leadership yields higher welfare When private firms are domestic, private leadership yields higher welfare. Pal (1998), Matsumura (2003a) When private firms are foreign, public leadership yields higher welfare. Matsumura (2003b) These outcomes are equilibria in the observable delay game. Pal (1998), Matsumura (2003b), Matsumura and Ogawa (2010) All papers ignore the subsidy policy

12. OT2010 12 Related Literature (3) (3) International competition Public firm maximizes domestic welfare →The public firm's behavior is dependent on whether its rivals are domestic or foreign If the rivals are foreign, the public firm becomes more aggressive. Fjell and Pal (1996)←De Fraja and Delbono (1989) Strategic Trade Policy Pal and White (1998) ← Strategic Trade Policy FDI Mukherjee and Suetrong (2009) ← FDI Chang (2005), Chao and Yu (2006), Fujiwara (2006) ← partial privatization version

13. OT2010 13 Related Literature on Mixed Oligopoly(4) (4) Privatization Neutrality Theorem (PNT) (4-a) Privatization does not affect welfare under simple optimal subsidy policy, unit production subsidy. White (1996), Tomaru (2006), Kato and Tomaru (2007), Hashimzade (2007) (4-b) Public Leadership, private leadership, mixed Cournot, and private oligopoly yield the same welfare under optimal subsidy policy above. Poyago-Theotoky (2001), Tomaru and Saito (2010)

14. OT2010 14 Privatization Neutrality Theorem Privatization Neutrality Theorem: Privatization does not matter under optimal subsidy policy. It implies that if the optimal subsidy policy is adopted, discussing mixed oligopoly or privatization policy does not make sense. Most of the results in mixed oligopoly literature have quite limited implications and importance if this theorem is really robust. Destructive Result, Disaster for researchers in this field.

15. OT2010 15 Intuition behind PNT Suppose that all firms are symmetric. Consider the private oligopoly. The first best is achieved when P=c i ' (price =marginal cost) ~ all firms choose the same output level It is achieved by the production subsidy s*.

16. OT2010 16 Intuition behind PNT Suppose that one firm is nationalized. Suppose that all of remaining firms do not change their outputs. The nationalized firm, which is welfare-maximizer, never changes its output. All remaining private firms obviously have no incentive to change their outputs. →s* yields the first best outcome in the mixed oligopoly.

17. OT2010 17 Condition for PNT When I explain the intuition behind PNT, I do not use any of the conditions (1) profit-maximizing private firms (2) homogeneous product market, (3) single public firm and so on. All we use is the conditions that the first best is achieved at the symmetric equilibrium, that the first best is achieved by controlling outputs only, and that the pubic firm is welfare maximizer.

18. OT2010 18 Robustness of PNT Privatization Neutrality Theorem is far from robust: (1) PNT obviously does not hold when there is cost difference between public and private firms. (2) PNT does not hold unless all firms are domestic.~ This paper (3) PNT does not hold at free entry markets ~Cato and Matsumura (4) If there is an excess burden of taxation, PNT does not hold. ~Matsumura and Tomaru, another paper (5) PNT does not hold if firms control two or more independent variables

19. OT2010 19 Notations m: Number of private firms θ: ration of foreign private firms q i : Firm i's output, Q: Total output C i (q i ) =0.5(qi) 2 : Firm i's production cost P(Q)=a-Q: linear demand function π i : Firm i's profit, W: domestic social surplus, Superscript S: Equilibrium value at the second stage game Superscript M, P, L, F: Equilibrium value in the mixed Cournot oligopoly, private oligopoly, public leadership, private leadership

20. OT2010 20 The Model foreign private firms, domestic private firms, Players: government, firm 0 (public firm), mθ foreign private firms, m(1-θ) domestic private firms, Payoffs: domestic welfare (government 、 firm 0), Its own profits (private firms). (1) Government chooses s (unit production subsidy). and s, firms face Cournot competition (Section 3) or Stackelberg Competition (Section 4). (2) Given m, θ and s, firms face Cournot competition (Section 3) or Stackelberg Competition (Section 4).

21. OT2010 21 Optimal Subsidy Rate Suppose that θ>0. (1) s P and s M can be either positive or negative (2) s P is decreasing in θ, while s M can be either increasing or decreasing in θ. (3) Either s P > s M or s P < s M is possible. (3) implies that privatization neutrality theorem on subsidy rate does not hold.

22. OT2010 22 Resulting Welfare Suppose that θ>0. W P >(<) W M when n is large (small). (a) Privatization neutrality theorem on welfare holds only when θ=0. (b) Privatization more likely improves welfare when the market is more competitive.

23. OT2010 23 Public Leadership, Private Leadership Suppose that θ>0. Public leadership more likely yields larger domestic welfare than the private leadership when n is larger and θ is larger. Privatization neutrality theorem on welfare again holds only when θ=0.

24. OT2010 24 Summary Privatization Neutrality Theorem is quite vulnerable. →We can continue to make intensive researches on mixed oligopoly without bothering PNT. Competition, Privatization, and Trade Policies are very closely related.