PRIVATISATION IN A REGULATED MARKET, OPENTO FOREIGN COMPETITION

The emerging literature on interaction between strategic trade theoryand privatisation uses a simple example to argue that the irrelevanceresult is invalidated if the domestic market is open to foreigncompetition.This paper uses a fairly general framework to show that anythinga regulated privatized industry can achieve can always be mimickedby instructing the public firm to pursue an appropriate policy in aregulated mixed market structure. In the presence of a foreign competitor,this requires the public firm to follow the adjusted marginalcost pricing rule. But the public firm will not follow this rule if itis obliged to move with the private firms simultaneously...