Joint work with Daisuke Shimizu

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1 Joint work with Daisuke Shimizu
Privatization Waves Joint work with Daisuke Shimizu 2005/10/26　寡占理論

2 Plan of the presentation
(1) Rough sketch of the model and results (2) Explanation of mixed oligopoly (3) Overview of related works on mixed oligopoly (4) Formal explanation of our model (5) Results and implications 2005/10/26　寡占理論

3 Rough sketch of the model
・m state-owned public firm compete against N-m private firms. ・Each public firm maximizes welfare, while each private firm maximizes its own profits. ・N firms face Cournot competition. Our main concerns: Relationship between m and welfare. 2005/10/26　寡占理論

4 Motivation We focus on the following situations
Large scale of privatization program in developing or former communist transitional economies Sequential privatizations ←There are so many public firms that the government cannot privatizes all public firms at the same time. 2005/10/26　寡占理論

5 Problem Dose a privatization of a public firm improve welfare more likely when the number of remaining public firm is large or small? If large, the success of the earlier stage privatization does not guarantee the subsequent privatizations. If small, the fail of the earlier stage privatization does not imply the fail of the subsequent privatization. 2005/10/26　寡占理論

6 Result 1 (1) W(m) is decreasing if the public firms are significantly less efficient than the private firms. If public firms are sufficiently less efficient than the private firms, privatization improves welfare regardless of m and N 2005/10/26　寡占理論

7 Result 1 W m (the number of public firms) 2005/10/26　寡占理論

8 Result 2 (2) W(m) is increasing if the cost difference between public firms and private firms are sufficiently small and the number of total number of firm N is small. 　The government should improve the competitiveness of the market before privatizing the public firms. 2005/10/26　寡占理論

9 Result 2 W m (the number of public firms) 2005/10/26　寡占理論

10 Result 3 (3) W(m) is U-shape if the cost difference between public firms and private firms are sufficiently small and the number of total number of firm N is large. This is the most interesting case 2005/10/26　寡占理論

11 Result 3 W m (the number of public firms) 2005/10/26　寡占理論

12 Even if privatization does not improve welfare at the early stages, it can eventually lead to a point such that privatizations after that point on are beneficial to the society W m1 m 2005/10/26　寡占理論

13 Larger scale privatization program eventually more likely end up with great success
m2 m1 m m3 2005/10/26　寡占理論

14 Welfare-gains of privatizations is accelerating
m3 m2 m1 m 2005/10/26　寡占理論

15 Mixed Oligopoly, Mixed Market
Public firms compete against private firms 2005/10/26　寡占理論

16 Examples of mixed oligopoly in Japan
Banking: Postal Bank, DBJ, Iwate Bank Housing Loan: the Public House Loan Corporation Private Funds: DBJ, Industrial Revitalization Corporation of Japan Life Insurance: Postal Life Insurance (Kampo) Overnight Delivery: Japan Post Energy: Public Gas Corps (Narashino, Fukui,...) Broadcasting: NHK 2005/10/26　寡占理論

17 Examples of mixed oligopoly in other countries
Banking: Postal Banks (New Zealand, U.K., Germany,...) Automobiles: Renault, VW Medicine: Public Institute in Brazil National Defense, Aviation: \ EADS, Airbus Airline: National airlines (Swiss, Belgian, France,...) Overnight Delivery: USSP Energy: Electricite de France, Gas de France Broadcasting: BBC 2005/10/26　寡占理論

18 Differences between public and private firms
(1)　Public firms are less efficient than private firms. →Many empirical works does not support this view (and many other papers support this view). (2) Difference of objective function →private firm maximize its own profits, public firm care about social welfare 2005/10/26　寡占理論

19 Classical discussions of public firms
Why do public firms exist? (1) Natural monopoly (a) Public firm monopoly (b) Regulated private firm monopoly 2005/10/26　寡占理論

20 Non-Profitable Market
Ｐ ＡＣ Ｄ Ｙ 2005/10/26　寡占理論

21 Classical discussions of public firms(2)
Why do public firms exist? (2) Unprofitable market (a) Public firm monopoly (b) Private firm monopoly with subsidy (compensation of deficit from public funds) 2005/10/26　寡占理論

22 Natural Monopoly Ｐ Ｄ ＡＣ Ｙ 2005/10/26　寡占理論

23 Classical discussions on state-owned public firms
→Public firm is the monopolist In real economies, public firms are not always monopolists. Public firms do not always faces significant economy of scale, which guarantees the monopoly by the public firm 2005/10/26　寡占理論

24 Problems (1) How to provide an incentives for welfare maximization?
→ This is the central issue for the public firm‘s monopoly 2005/10/26　寡占理論

25 Problems (2) Is the welfare-maximizing behavior by the public firm is efficient? →This problem never appears in the public firm's monopoly. This question makes sense in mixed oligopoly because welfare-maximizing behavior by the public firm might worsen welfare through strategic interaction between public and private firms. →This is the central issue of the mixed oligopoly 2005/10/26　寡占理論

26 Issues of mixed oligopoly
・Is welfare-maximizing behavior by the public firm desirable in mixed oligopoly ? ・What distortion does welfare-maximizing behavior by the public firm yield ? 　 2005/10/26　寡占理論

27 This paper's approach (1) We do not make restrictions on the difference of production efficiency between public and private firms. (For the discussion of endogenous cost differences, see Matsumura and Matsushima (2004).) (2) Private firm maximizes its own profits, public firm maximizes social welfare. （For more general objective function, see Matsumura (1998). (3) The number of firms is given exogenous. （For endogenous number of private firms, see Matsumura and Kanda (2004).） (4) Simultaneous-move game (For sequential or endogenous move game, see Pal (1998), and Matsumura(2003a, 2003b).) 2005/10/26　寡占理論

28 De Fraja and Delbono(1989) ・ Cournot-type (quantity-setting competition, simultaneous-move game) ・No cost differences between public and private firms. ・Linear demand and Quadratic cost function. ・The private firm maximizes its own profits. ・The public firm maximizes social welfare. →The public firm chooses its output level so as to the price equal to its marginal cost. 2005/10/26　寡占理論

29 Results →Privatization of the public firm might improve welfare
Compare the pure economy (after the privatization) to the mixed economy (before the privatization) →Privatization of the public firm might improve welfare WP >WM or WP<WM. 2005/10/26　寡占理論

30 Intuition ・ Privatization of the public firm reduces x0 and increases x1 (production substitution). An increase of x1 improves welfare. A decrease of x0 reduces welfare. It is possible that the former effect dominates the latter effect. →Privatization might improve welfare. 2005/10/26　寡占理論

31 Production substitution
reaction curve after privatization reaction curve of the private firm reaction curve after privatization 2005/10/26　寡占理論

32 More detailed explanation of intuition
Privatization of the public firm reduces x0 and increases x1 (production substitution). Before Privatization p=c0' >c1' → Public firm's marginal cost is higher than private firm's → Production substitution from public to private economize production costs} →Welfare-improving →Privatization reduces total production level and so consumer surplus → Welfare-impairing It is possible that the former effect dominates the latter effect. 2005/10/26　寡占理論

33 Contribution of De Fraja and Delbono (1989)
・No cost difference between public and private firms → privatization does not improves production efficiency ・Public firm's objection: welfare →No agency problem in the public firm ・No additional policies by regulation , tax, or subsidy ⇒Ideal circumstances for the existence of public firm. Against assumptions for the advocators of privatizations. → Nevertheless, privatization might improves welfare 2005/10/26　寡占理論

34 Assumptions of De Fraja and Delbono (1989)
Many researchers in this filed believe that the assumptions above are plausible, but many other researchers (as well as I) make these assumptions for strategic purposes. ・ Even without cost differences, privatization improves welfare. →If public firm is less efficient, much more. ・ Even without any agency problem in the public firm, privatization improves welfare. →If public firm has agency problem, much more. 2005/10/26　寡占理論

35 Assumptions of single public firm
Most existing works consider models with single public firm. If this single public firm is privatized, the market becomes pure market economy. Considering desirable reform of the economic system in former communist transitional countries, this is not a plausible assumption. In reality numerous public firms exists in such countries and it is politically impossible to privatize all of the public firms at the same time. Considering large scale privatization program in traditional mixed economies, one privatization does not yield pure market economy (because substantial public firms remains after the privatization of several firms). →Existing works cannot analyze these markets effectively. 2005/10/26　寡占理論

36 公企業１社のモデルでは分析が難しい事例 旧社会主義国・移行国の民営化プログラムの分析（ロシア等の旧ソ連諸国、東欧、中国、ベトナム、モンゴル...） 歴史的に多くの公企業を抱えた途上国、新興国の公企業改革プログラム（ブラジル、インド、イラン、ベネズエラ、インドネシア、タイ、台湾、韓国...） 大規模で組織的な民営化プログラムを成功させた（？）先進国の分析（英国、日本（？）、ドイツ（？）、豪州、NZ） かなりの規模の公企業群がまだのこり、その一体改革が予想される先進国の分析（日本、ドイツ、フランス） 2005/10/26　寡占理論

37 なぜ既存研究が１国１公企業モデル を扱うのか？
公私の費用格差がなければ、N=m でobviousにfirst bestが達成される → 私的部門を全く持たない完全な計画経済で常にfirst bestが達成される →そもそも混合寡占を分析する意味がなくなる しかしこの分野の人間は私的部門を全く持たない完全な計画経済で常にfirst bestが達成されるという結果がrealisticだとは思っていない 2005/10/26　寡占理論

38 費用構造に関する仮定 公私の費用格差がないという仮定は戦略的な仮定であると同時に、現実的な仮定と考える研究者も多い
← 混合市場では公企業も私企業との競争を強いられるので、私企業に比べて極端に非効率的だと生き残れない（競争圧力） m=Nとなってしまうとこの競争圧力が減って、Ｘ非効率の問題が深刻になる →複数の公企業を抱える可能性をはじめから否定してm=Nならfirst bestという無意味な議論を回避する 2005/10/26　寡占理論

39 この論文でやりたいこと 経済全体で１００社企業がありそのうち公企業が２５社いる状態から出発して、公企業を２４社、２３社、２２社と減らしていくと経済厚生はどうなるのかを議論する意味はある。 この論文では、この分野のタブーを犯してでもあえてこの問題に挑戦する。 2005/10/26　寡占理論

40 Notations N: Number of total firms m: Number of public firms
qi: Firm i's output Ci(qi) : Firm i's production cost p(Q): demand function Q: Total output πi: Firm i's profit CS: Consumer surplus W: social surplus 2005/10/26　寡占理論

41 The model Players: Identical m public firms,
　　　　　　identical N-m private firms. Payoff: Welfare (Public firm), 　　　　　Its own profits (Each private firm). All firms simultaneously choose their　outputs　　　　　　　　　　　　　　　　　　（Cournot competition）. Linear demand: p=A-Q. Quadratic costs: c=0.5 α(qi)２　(public firm), 　　　　　　　　　　　 c=0.5 β(qi)２ (public firm), 　　　　　　　　　　　　　　α≧β 2005/10/26　寡占理論

42 Why quadratic costs？ Constant marginal cost yields problems
If marginal costs are constant and no cost differences exists, the public firm's monopoly yields the first best. → It is nonsense to discuss to mixed oligopoly in such a circumstances. 2005/10/26　寡占理論

43 How to avoid this problem?
(1) Using constant marginal costs and assuming cost differences between public and private firms. Pal (1998), Matsumura (2003) (2) Using increasing marginal costs. De Fraja and Delbono (1989), Matsumura and Kanda (2005), This paper. (3) Dropping the assumption of homogenous goods. Cremer et al (1992), Anderson et al (1997), Matsumura and Matsushima (2003, 2004), Matsushima and Matsumura (2003). 2005/10/26　寡占理論

44 Proposition 1 Iｆ α>(β+1)2 /(β+2), then W* is decreasing in m.
　If cost difference between public and private firms is sufficiently large, privatization of a public firm always improve welfare regardless of N and m. →This is because privatization improves production efficiency 2005/10/26　寡占理論

45 Proposition 1（the cases where public firms is extremely inefficient）
m (the number of public firms) 2005/10/26　寡占理論

46 Proposition 2 Iｆ and (1) then W* is non-decreasing in m and strictly
　increasing if m>0 or (1) is satisfied with strict inequality. 2005/10/26　寡占理論

47 Proposition 2（cost difference between public and private firm is small and the market is not sufficiently competitive） W m (the number of public firms) 2005/10/26　寡占理論

48 Proposition 3 Iｆ and (1) is not satisfied, then
(i) W* is decreasing in m for 　is minimized at and increasing in m for 　　　where (ii) W* is convex with respect to m for 2005/10/26　寡占理論

49 Proposition 3（cost difference between public and private firm is small and the market is sufficiently competitive W m (the number of public firms) 2005/10/26　寡占理論

50 ・Larger scale privatization program eventually more likely ends up with great success ・Failureｓ at early stage do not imply the failure of the　whole privatization program W m2 m2’ m1 2005/10/26　寡占理論

51 Welfare-gains of privatizations is accelerating
m m3 m2 m1 m0 2005/10/26　寡占理論

52 Intuition Suppose that m public firms and N-m private firms exit. Suppose that one public firm is privatized. →Production substitutions from the privatized firm to m-1 public firm and to N-m private firms take place. →The former production substitution impairs welfare and the latter improves welfare. →The latter becomes stronger when m is smaller and N is larger. 2005/10/26　寡占理論

53 まとめ →民営化プログラムを一度軌道に乗せればあとは自然にうまくいく。最初が一番しんどい。
・初期の民営化の失敗がプログラム全体の失敗を意味しない →評価には長期的な視野が必要。 ・小規模な民営化は失敗しやすい。 ・民営化の利益は最終段階に近づくほど大きい →民営化プログラムを一度軌道に乗せればあとは自然にうまくいく。最初が一番しんどい。 2005/10/26　寡占理論