Optimal privatisation, and optimum-welfare and maximum-revenue tariffs

Abstract

We examine the effect of privatisation on the priority of the maximum-revenue tariff and the optimum-welfare tariff in an international mixed oligopoly with foreign competition and optimal privatisation. We demonstrate that when the marginal cost of the domestic privatised firm is high enough, the optimum-welfare tariff will exceed the maximum-revenue tariff. Moreover, due to the higher tariff rate that leads to the high degree of privatisation, the optimum-welfare tariff generates greater optimal privatisation than the maximum-revenue tariff does. Lastly, when the gap between the number of domestic private firms and that of their foreign counterparts becomes larger, the optimum-welfare tariff will exceed the maximum-revenue tariff.

Keywords:

• Mixed oligopoly
• partial privatisation
• tariff ranking

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 A government can impose tariffs for several reasons. Welfare maximisation is not always the only driver. See Williamson (2006) for detailed discussion and Blattman, Clemens, and Williamson (2002) for the empirical support and analysis regarding the reason why a government imposes a tariff. In addition, tariffs are not always designed to protect domestic producers (Tena-Junguito 2006), while sometimes intensified import competition from abroad can increase the productivity of domestic firms (Mion and Zhu 2013). The reason why a government imposes a tariff is indeed a topic worth exploring, but it is not within the scope of this paper.

2 Tian and Xia (2017) focus on the relationship between China’s accession to the WTO and its SOE reform. They show that the major incentive for China to join the WTO is to accelerate its SOE reform and improve domestic welfare.

3 To further address the issue, Clarke and Collie (2008) incorporate delegation into the behaviour of policymakers. They show that exporting countries may be better off if they delegate to policymakers who prefer revenue-maximum tariffs. But a Nash equilibrium does not necessarily involve the countries delegating to this kind of policymakers.

4 Wang, Wang, and Zhao (2009) do not incorporate partial privatisation and the tariff ranking to examine how different sequences of moves by firms can influence the government’s decisions on optimal tariff and privatisation policies. On the other hand, Wang and Chen (2010) specifically study the impact of cost efficiency and the free entry of importing firms. However, their analysis assumes no importing tariffs imposed on foreign firms and includes a subsidisation policy.

5 Several analyses have focussed on the relationship between the optimum-welfare tariff and the level of partial privatisation. Maw (2002) gives reasons for the adoption of partial privatisation in the process of changing from a centrally planned economy to a market economy. Chang (2005) analyses the policies of optimal trade and privatisation by using the framework of Matsumura (1998). Chao and Yu (2006) examine the effect of partial privatisation and foreign competition on the policies of optimal tariffs. They find that foreign competition negatively affects the optimal tariff rate while partial privatisation positively affects it. Van Long and Stähler (2009) discuss how state ownership affects the policies of optimal import tariffs and export subsidies under a mixed setting. However, among these papers, the effect of revenue-maximum tariffs has been overlooked.

6 Corneo and Jeanne (1994, discussion paper version in 1992) primarily argue that, in an international mixed oligopoly, the objective of public firms can be expressed uniquely in terms of exports in equilibrium; and further, the export quantity must be equal to the output of private firms. Mixed oligopoly modelling with importing competitors can also be seen in Fjell and Pal (1996) and Pal and White (1998).

7 The free entry of firms itself is a topical issue named the excess–entry theorem, which is initially discussed by Mankiw and Whinston (1986). Ghosh and Morita (2007a; 2007b) build upon the analysis of Mankiw and Whinston (1986) by considering the market power of upstream firms within a vertical structure. While these three papers primarily focus on closed economies, Marjit and Mukherjee (2013) consider the issue in an open economy setting. Han, Emranul, and Mukherjee (2020) further generalise the analysis by considering both closed and open economies, as well as incorporating complementary and substitutable inputs, which have been overlooked in the existing literature that have primarily focussed on substitutable inputs. The literature also considers additional factors such as economies of scale (Suzumura and Kiyono 1987; Okuno-Fujiwara and Suzumura 1993; Anderson, de Palma, and Nesterov 1995; Fudenberg and Tirole 2000; Mukherjee 2010), non-scale economies with cost differences (Lahiri and Ono 1988; Ghosh and Saha 2007), and licensing (Wang and Zeng 2019; Mukherjee and Mukherjee 2008). These studies provide further insights into the dynamics of market entry and competition in different economic contexts.

8 When $c_0^{}\le c_j^{},$ no foreign firm will choose to produce and export. Extended specifications can be seen in Huang, Lee, and Chen (2006).

9 Apart from maximising welfare, a public firm could have other aims, including the maximisation of profits and its employees’ income, and so forth. See De Fraja and Delbono (1989), Katsoulacos (1994), Fjell and Pal (1996), and Pal and White (1998) on modelling public firms as a social welfare maximiser.

10 It should be noticed that the timing sequence of tariffs and the level of privatisation do not affect the equilibrium of optimal tariffs and the degree of privatisation.