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An Efficient Privatization Mechanism

Author

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  • Nejat Anbarci

    (Florida International University)

  • Mehmet E. Karaaslan

    (Alfred University)

Abstract

In this paper, we consider the privatization of State-Owned Enterprises (SOEs) that are legal monopolies but not natural monopolies; their markets can be opened to competition once privatization takes place and other competitors can emerge and compete successfully against them in a few years. But until that happens, these privatized SOEs can have a significant level of market power. The currently used "Revenue Maximization (RM)" privatization scheme maximizes the government revenue from privatization but does not provide sufficient incentives for the privatized SOE eiher to charge a price lower than the monopoly price or to improve production efficiency until competition arises. We propose a new scheme to privatize such SOEs. We term this new scheme the "Welfare Maximization (WM)" scheme. The WM scheme practically yields no revenue to the government from the privatization of any such SOE; however, it induces the privatized SOE to charge a competitive price in the absence of any regulation. It also turns out that the WM scheme provides greater incentives for post-privatization process invention (i.e., for post- privatization cost reduction) than RM scheme.

Suggested Citation

  • Nejat Anbarci & Mehmet E. Karaaslan, 1996. "An Efficient Privatization Mechanism," Industrial Organization 9601001, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpio:9601001
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    References listed on IDEAS

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    1. Richard A. Posner, 1972. "The Appropriate Scope of Regulation in the Cable Television Industry," Bell Journal of Economics, The RAND Corporation, vol. 3(1), pages 98-129, Spring.
    2. John Vickers & George Yarrow, 1988. "Privatization: An Economic Analysis," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262720116, April.
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    Cited by:

    1. Mohamed Jellal & François-Charles Wolff, 2003. "Privatisation et négociation collective," Revue d’économie du développement, De Boeck Université, vol. 11(1), pages 73-99.

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