Downstream Subsidization and Upstream Privatization with a Vertically Integrated Foreign Firm

Zhang, Chuyuan and Lee, Sang-Ho (2021): Downstream Subsidization and Upstream Privatization with a Vertically Integrated Foreign Firm.

Abstract

This study constructs a model with a vertical structure in which a state-owned enterprise (SOE) in an upstream market and a private firm in a downstream market compete with a vertically integrated foreign firm (VIFF). Given a cost-inefficient SOE, we examine the strategic entry decision of a VIFF that can enter either the upstream, or the downstream market, or both, under downstream subsidization and upstream privatization policies. We find that when the government implements a subsidy policy, the VIFF enters only the downstream market if the cost inefficiency is low and enters both markets otherwise; however, the social welfare of the later is always higher than that of the former. We also find that reducing the cost inefficiency might cause welfare loss when ex-ante inefficiency is intermediate, below which the VIFF might change its entry decision. Finally, we show that an upstream privatization policy reduces welfare either when the cost inefficiency ex-post privatization decreases to a lesser degree or when the ex-ante inefficiency is relatively low.

• Item Type: MPRA Paper
• Language: English
• Keywords: Downstream Subsidization · Upstream Privatization · Vertically Integrated Foreign Firm · Cost Inefficiency · Entry Decision · Mixed Market
• Subjects: D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency ; Optimal Taxation; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets

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