The Optimal Government Shareholding Strategy and the Cost Structure

Chin-Shu Huang ; Jen-Yao Lee ; Shih-Shen Chen

Professor, Department of Economics, National Chung Cheng University, Chia-Yi, TAIWAN, Tel: +886-5-2720411 (ext. 34102) ecdah@ccu.edu.tw
Assistant Professor, Department of Finance, Kao Yuan University, Kaohsiung, TAIWAN cculee@seed.net.tw
Assistant Professor, Department of International Business and Trade, Shu-Te University, Kaohsiung, TAIWAN chenss@mail.stu.edu.tw

JEL Classfication: D43, L21, L51

Abstract

This paper analyzes government's optimal shareholding strate@ within the framework of the mixed oligopoly. It is found that: (1) When both public and domestic firms have the same cost coefficient, the government's best policy is to adopt the full mixed oligopoly. (2) When the cost coefficient of the public firm is lower than a threshold value, the government should opt for a full mixed-oligopoly policy. However, when the public firm's cost coefficient is higher than the threshold value, the government should privatize the public firnl completely and exit the market. The single mixed oligopoly is just an alternative proposal when it fails to transform all of the private firms into mixed ownership enterprises.

Keywords:

Public firm, Mixed oligopoly, Privatization, Mixed ownership enterprise

Acknowledgments

We are grateful to anonymous referees for their helpful comments. All remaining errors are ours.

References

Barros, F. “Incentive Schemes as Strategic Variables: An Application to a Mixed Oligopoly.” International Journal of Industrial Organization 13 (No. 3 1995): 373-86. [https://doi.org/10.1016/0167-7187(94)00461-A]
Byrd, W. “Plan and Market in the Chinese Economy: A Simple General Equilibrium Model.” Journal of Comparative Economics 13 (June 1989): 177-204. [https://doi.org/10.1016/0147-5967(89)90001-2]
Cremer, H., Marchand, M., and Thisse, J. F. “The Public Firm as an Instrument for Regulating an Oligopolistic Market.” Oxford Economic Papers 41 (No. 2 1989): 283-301. [https://doi.org/10.1093/oxfordjournals.oep.a041895]
De Fraja, G., and Delbono, F. “Alternative Strategies of a Public Enterprise in Oligopoly.” Oxford Economic Paper 41 (No. 2 1989): 302-11. [https://doi.org/10.1093/oxfordjournals.oep.a041896]
Fershtman, C. “Internal Organization and Managerial Incentives as Strategic Variables in Competitive Environment.” International Journal of Industrial Organization 3 (June 1985): 243-53. [https://doi.org/10.1016/0167-7187(85)90007-4]
Fershtman, C. “The Interdependence between Ownership Status and Market Structure: The Case of Privatization.” Economica 57 (No. 227 1990): 319-28. [https://doi.org/10.2307/2554937]
Fershtman, C., and Judd, K. L. “Equilibrium Incentives in Oligopoly.” American Economic Review 77 (No. 5 1987): 927-40.
Fjell, K., and Pal, D. “A Mixed Oligopoly in the Presence of Foreign Private Firm.” Canadian Journal of Economics 29 (No. 3 1996): 737-43. [https://doi.org/10.2307/136260]
Gal-Or, E. “Internal Organization and Managerial Compensation in Oligopoly.” International Journal of Industrial Organization 11 (No. 2 1993): 157-83. [https://doi.org/10.1016/0167-7187(93)90002-T]
George, K., and La Manna, M. “Mixed Duopoly, Inefficiency, and Public Ownership.” Review of Industrial Organization 11 (No. 6 1996): 853-60. [https://doi.org/10.1007/BF00174411]
Huang, Chin-Shu, and Lee, Jen-Yao. “The Output Determination of State-Owned Enterprise under Gradual Price Reform of Chinese Economy.” Asia-Pacific Economic and Management Review (March 2000): 117-44 (in Chinese).
Huang, Chin-Shu, Liu, Chu-Jun, and Wang, Feng-Sheng. “The Entry of Non-state Enterprises and the Output of State-owned Enterprises.” The Journal of World Economy (June 2001): 10-8 (in Chinese).
Katsoulacos, Y. “Firm's Objectives in Transition Economies.” Journal of Comparative Economics 19 (No. 3 1994): 392-409. [https://doi.org/10.1006/jcec.1994.1109]
Lin, Yi-Fu, Cai, Fang, and Li, Chou. The China's Miracle: Development Strategy and Economic Reform. Hong Kong: The Chinese University Press, 1994 (in Chinese).
Mastsumura, T. “Partial Privatization in Mixed Duopoly.” Journal of Public Economics 70 (No. 3 1998): 473-83. [https://doi.org/10.1016/S0047-2727(98)00051-6]
Merrill, R. G., and Schneider, N. “Government Firm in Oligopoly Industries: A Short Run Analysis.” Quarterly Journal of Economics 80 (No. 3 1966): 400-12. [https://doi.org/10.2307/1880727]
Murphy, K. M., Shleifer, A., and Vishny, R. W. “The Transition to a Market Economy: Pitfalls of Partial Reforms.” Quarterly Journal of Economics 57 (No. 3 1992): 889-906. [https://doi.org/10.2307/2118367]
Naughton, B. “Chinese Institutional Innovation and Privatization from Below.” American Economic Review 84 (No. 2 1994): 266-70.
Pal, D., and White, M. “Mixed Oligopoly, Privatization, and Strategic Trade Policy.” Southern Economic Journal 65 (No. 2 1998): 264-81. [https://doi.org/10.2307/1060667]
Qian, Ying-Yi, and Xu, Cheng-Gang. “Institutional Foundation of Entry and Expansion of the Non-State Sector in China.” Hong Kong Journal of Social Sciences Special Issue (July 1995): 223-61 (in Chinese).
Sen, A. “Entry and Managerial Incentives.”　International Journal of Industrial Organization 11 (No. 1 1993): 123-37. [https://doi.org/10.1016/0167-7187(93)90039-F]
Sullivan, J. D. “Institutions and Private Sector Development.” China Economic Review 9 (No. 1 1998): 85-95. [https://doi.org/10.1016/S1043-951X(99)80006-6]
Weng, Yungho, Lo, Yushan, and Liu, Bihjane. “The Optimal Degree of Privatization and Market Structure.” Academia Economic Papers 30 (No. 2 2003): 149-69 (in Chinese).
White, M. D. “Mixed Oligopoly, Privatization, and Subsidization.” Economics Letters 53 (No. 2 1996): 189-95. [https://doi.org/10.1016/S0165-1765(96)00916-0]
Zhou, H. “Behavior of State Enterprise in a Hybrid Economy with Imperfect Markets.” Economic Systems 18 (No. 1 1994): 35-54.
Zhou, H. “Partial Reform and Full Price Liberalization in the Short and the Long Run.” China Economic Review 8 (No. 1 1997): 53-66. [https://doi.org/10.1016/S1043-951X(97)90012-2]