Privatization Policy and Dynamics of the Retail Market in a Transitional Economy

This paper develops a theoretical framework in which the impact of different privatization strategies on the dynamics of the retail market in a transitional economy can be analyzed. The analysis shows that rational behavior of the monopolistic manufacturer under uncertainty of demand naturally implies organization of the retail market. The equilibrium characteristics of unrestricted (competitive) and restricted (monopolistic) retail markets are analyzed, and the theoretical results derived are applied to study the effects of various sequences of privatization on the dynamics of the retail market in a transitional economy. Our findings indicate that privatizing the manufacturer first is always at least as good as privatizing the retailers first because (unlike the strategy of privatizing the retail sector first) it neither decreases the number of firms in the retail market nor the profitability of the state owned firms in the transition period (in the unrestricted retail market both the number of retail firms and the profitability of state owned firms increase)