Optimal Trade and Privatization Policies in an International Mixed Market

Rong Yu ; Sang-Ho Lee

Manager, Department of Sales Management, Shanghai Medison Medical Instrument Co., Shanghai, China, Tel: ＋86-21-5079-7887, Fax: ＋86-21-5079-6082 yurong@medison.com
Corresponding Author, Professor, Department of Economics, Chonnam National University, Gwangju 500-757, Korea, Tel: ＋82-62-530-1553, Fax: ＋82-62-530-1559 sangho@chonnam.ac.kr

JEL Classification: L32, D43, F14

Abstract

This paper examines the optimal trade and privatization policies in an international mixed market where a domestic public firm competes against domestic and foreign private firms. We consider a trade policy combination of production subsidy and import tariff, and compare the optimal trade and privatization policies under either Cournot or Stackelberg competition. We find that the optimal trade policies consist of a domestic production subsidy and an import tariff, which are identical under the two regimes regardless of the competition pattern. However, the optimal privatization policy depends on the competition patterns, whether Cournot or Stackelberg competition. In particular, the optimal privatization policy under Cournot competition is complete privatization, whereas that under Stackelberg competition is full nationalization. Finally, we show that if the government can only use a single trade policy instrument, the production subsidy gives a better social welfare benefit than the import tariff.

Keywords:

Privatization policy, Trade policy, Production subsidy, Import tariff, Mixed Cournot oligopoly, Mixed Stackelberg oligopoly

Acknowledgments

We are grateful to Taegi Kim, Kyung-Seok Park, and two anonymous referees for their helpful and constructive comments.

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