Privatization in mixed duopoly with vertical differentiation: Price versus quantity competition

Abstract

In this paper, we investigate the issue of privatization in a mixed duopoly with vertical differentiation under Cournot and Bertrand competition. The public firm is assumed to produce a lower-quality product with lower production costs. We find that under both Bertrand and Cournot competition, privatization is socially desirable (undesirable) if the quality level of the private firm is sufficiently high (low). However, if the quality of the private firm is intermediate, Bertrand and Cournot competition yields opposite policy implications: privatization is desirable under Bertrand competition while undesirable under Cournot competition. Therefore, under Bertrand competition, privatization is more likely to be welfare-improving than under Cournot competition.