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Efficient performance by companies with mixed ownership: Privatization and divestiture of a vertically integrated public monopoly

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  • Sanford V. Berg
  • Makoto Okamura
  • Haruka Yane
  • Shinji Yane

Abstract

This paper examines a model of privatization and divestiture of a vertically integrated public monopoly. The framework is used to derive general conditions of how mixed companies might be used to promote efficient outcomes without assuming either an ideal social planner or superior cost performance of private enterprise. The conditions suggest that efficient public policy towards mixed (public‐private partnership) companies depends on basic cost and demand conditions. The results indicate that: (1) a vertically integrated private monopoly can be more efficient than any combination of mixed companies when there is a sufficiently flat linear (elastic) demand curve and relatively greater (upward sloping) marginal cost for the downstream sector; (2) an upstream public and downstream public firm can achieve the first best outcome when the downstream firm has constant marginal costs; and (3) a partial privatization of the upstream firm achieves higher welfare than taking that action for the downstream firm. The intuition behind the propositions is provided using standard features of cost and demand. While the implications for public policy regarding privatization and divestiture in infrastructure sectors are not definitive, the results underscore the importance of understanding cost and demand conditions when developing and implementing public policies.

Suggested Citation

  • Sanford V. Berg & Makoto Okamura & Haruka Yane & Shinji Yane, 2022. "Efficient performance by companies with mixed ownership: Privatization and divestiture of a vertically integrated public monopoly," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 93(3), pages 717-730, September.
    • Handle: RePEc:bla:annpce:v:93:y:2022:i:3:p:717-730
    DOI: 10.1111/apce.12330
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    References listed on IDEAS

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