Optimal Trade Policy in an International Mixed Oligopoly

Abstract

This paper investigates the effects of trade policies on the home country where homogeneous goods are supplied by a public firm, domestic private firms, and foreign private firms. It is shown that the home government always has an incentive to introduce positive tariffs in opening the economy regardless of whether there are public firms. Furthermore, if the optimal positive tariff is strategically introduced in privatizing the public firm, then privatization can improve welfare even when there are only a few firms in the market. This is in contrast to the existing literature that states that privatization worsens welfare in a closed mixed oligopoly with very few firms.