Taxing emissions and privatizing a state-owned enterprise under endogenous price-quantity competition

Abstract

This study considers an endogenous competition mode between price and quantity and explores policy interaction between emission tax and privatization when a vertically integrated state-owned enterprise competes with a downstream firm that purchases inputs from an upstream supplier in its supply chain. We find that when the product substitutability is low (high), firms choose Bertrand (price-quantity) competition under a nationalization regime, whereas they choose quantity-price (Cournot) competition under a privatization regime. We demonstrate that an institutional change with privatization and emission tax could switch market competition mode from aggressive Bertrand (price-quantity) to conservative Cournot competition if (unless) the product substitutability is intermediate, which leads to improved (reduced) welfare. Our findings suggest that appropriate coordination between privatization and environmental policies in a vertical relation can enhance welfare in an era of environmental transition.