Optimal privatization in a vertical chain : a delivered pricing model

The chapter considers the introduction of a mixed ownership firm into a classic model in which downstream firms locate strategically so as to achieve accommodating upstream price reductions. These reductions happen endogenously but the strategic locations harm welfare. It shows that a mixed ownership firm downstream can limit such inefficiency but that its ability to do so depends on the extent to which its costs match those of a private firm. Thus, reconfirming in this spatial setting that the optimal share of privatization set by a government depends positively upon the cost disadvantage of the public firm.