Privatization Decisions in a Mixed Duopoly under Endogenous Product Differentiation

Abstract We examine how endogenous product differentiation affects the behavior of a mixed duopoly market where a private firm competes with a partially privatized public firm under both Cournot and Bertrand competition. We also analytically derive the optimal degree of partial privatization of the public firm. Generally, privatizations increase the likelihood of no firm investing in equilibrium, resulting in markets with more homogenous goods. The public firm is more motivated to invest in product differentiation, particularly when prioritizing social welfare, while the private firm undertakes more investments when investments are not highly effective under Bertrand competition. We also demonstrate that a complete nationalization is not necessarily optimal in all contexts, and whether regulators privatize more or less depends on different market settings. Partial privatizations can enhance welfare when firms compete in quantities and investments in product differentiation are moderately effective. However, complete nationalization is socially optimal when firms compete in prices. JEL classification: D43, L13, L32, L33