Reversal of Bertrand–Cournot Ranking for Optimal Privatization Level

Abstract

We analyze a mixed duopoly market with a public and a private firm competing in the downstream market. The public firm is partially privatized and a regulator decides on the privatization level to maximize welfare. A foreign monopolist supplies a key input for producing the final commodity and may use uniform or discriminatory pricing; we observe that the presence of a foreign monopolist practicing price discrimination may lead to the privatization of a public firm. The overall findings show that under uniform pricing, the Cournot competition leads to higher privatization levels, while under discriminatory pricing, the Bertrand competition leads to higher privatization levels. The sensitivity of the Cournot–Bertrand rankings to the substitutability also depends on the pricing regime.