Abstract
This paper studies a single multinational market where private and public firms from different nationalities compete. The model allows the domestic government to subsidize its firms. In contrast to previous studies in this model, the subsidy varies with the market structure. Privatizing either the domestic public firm or the foreign public firm or both of them unambiguously increases the optimal subsidy rate and domestic social welfare. Nonetheless, both countries would benefit from simultaneous privatization.
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Notes
For details on the international commercial airline industry, see Doganis [2001].
Fjell and Heywood [2004] point out that these results depend critically on the assumption of the timing of moves after privatization. They show that privatization affects the optimal subsidy if the public firm remains a leader after privatization.
Neither are price and marginal cost related linearly as Sepahvand's [2002] adjusted marginal cost pricing indicates.
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Acknowledgements
The author would like to thank John Heywood, Gilbert Skillman and two anonymous referees for their insightful comments and suggestions. Any shortcoming is his and his alone.
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Appendices
Appendix A
Firms’ outputs equilibrium values when domestic government subsidizes domestic firms unilaterally.
Domestic private firm output:
Foreign private firm output:
Domestic Public firm output:
Foreign public firm output:
Total output:
Equilibrium price:
Appendix B
Appendix C
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Dadpay, A. Subsidization and Privatization: In a Multinational Mixed Oligopoly. Eastern Econ J 40, 5–25 (2014). https://doi.org/10.1057/eej.2012.23
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DOI: https://doi.org/10.1057/eej.2012.23