Optimal Trade and Privatization Policies in an International Mixed Market

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.