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Downstream Subsidization and Upstream Privatization with a Vertically Integrated Foreign Firm

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  • Zhang, Chuyuan
  • Lee, Sang-Ho

Abstract

This study constructs a model with a vertical structure in which a state-owned enterprise (SOE) in an upstream market and a private firm in a downstream market compete with a vertically integrated foreign firm (VIFF). Given a cost-inefficient SOE, we examine the strategic entry decision of a VIFF that can enter either the upstream, or the downstream market, or both, under downstream subsidization and upstream privatization policies. We find that when the government implements a subsidy policy, the VIFF enters only the downstream market if the cost inefficiency is low and enters both markets otherwise; however, the social welfare of the later is always higher than that of the former. We also find that reducing the cost inefficiency might cause welfare loss when ex-ante inefficiency is intermediate, below which the VIFF might change its entry decision. Finally, we show that an upstream privatization policy reduces welfare either when the cost inefficiency ex-post privatization decreases to a lesser degree or when the ex-ante inefficiency is relatively low.

Suggested Citation

  • Zhang, Chuyuan & Lee, Sang-Ho, 2021. "Downstream Subsidization and Upstream Privatization with a Vertically Integrated Foreign Firm," MPRA Paper 108193, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:108193
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    References listed on IDEAS

    as
    1. Toshihiro Matsumura & Noriaki Matsushima, 2012. "Airport Privatization And International Competition," The Japanese Economic Review, Japanese Economic Association, vol. 63(4), pages 431-450, December.
    2. Lee, Sang-Ho & Muminov, Timur K. & Tomaru, Yoshihiro, 2017. "Partial Privatization And Subsidization In A Mixed Duopoly: R&D Versus Output Subsidies," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 58(2), pages 163-177, December.
    3. Przemyslaw Kowalski & Max Büge & Monika Sztajerowska & Matias Egeland, 2013. "State-Owned Enterprises: Trade Effects and Policy Implications," OECD Trade Policy Papers 147, OECD Publishing.
    4. Sang‐Ho Lee & Hae‐Shin Hwang, 2003. "Partial Ownership For The Public Firm And Competition," The Japanese Economic Review, Japanese Economic Association, vol. 54(3), pages 324-335, September.
    5. Sang‐Ho Lee, 2006. "Welfare‐Improving Privatization Policy In The Telecommunications Industry," Contemporary Economic Policy, Western Economic Association International, vol. 24(2), pages 237-248, April.
    6. Yang, Ya-Po & Wu, Shih-Jye & Hu, Jin-Li, 2014. "Market Structure, Production Efficiency, And Privatization," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 55(1), pages 89-108, June.
    7. Seung-Leul Kim & Sang-Ho Lee & Toshihiro Matsumura, 2019. "Corporate social responsibility and privatization policy in a mixed oligopoly," Journal of Economics, Springer, vol. 128(1), pages 67-89, September.
    8. Shih‐Jye Wu & Yang‐Ming Chang & Hung‐Yi Chen, 2016. "Imported inputs and privatization in downstream mixed oligopoly with foreign ownership," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 49(3), pages 1179-1207, August.
    9. Antonio Capobianco & Hans Christiansen, 2011. "Competitive Neutrality and State-Owned Enterprises: Challenges and Policy Options," OECD Corporate Governance Working Papers 1, OECD Publishing.
    10. Winston W. Chang & Han Eol Ryu, 2015. "Vertically Related Markets, Foreign Competition and Optimal Privatization Policy," Review of International Economics, Wiley Blackwell, vol. 23(2), pages 303-319, May.
    11. Liu, Qian & Wang, Leonard F.S. & Chen, Charlie L., 2019. "Upstream privatization in mixed markets with retailer's efforts," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 338-345.
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    More about this item

    Keywords

    Downstream Subsidization · Upstream Privatization · Vertically Integrated Foreign Firm · Cost Inefficiency · Entry Decision · Mixed Market;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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