PRIVATIZATION AND EFFICIENCY IN A DIFFERENTIATED INDUSTRY

We consider a market in which a public firm competes against private o nes, and ask what happens when the public firm is privatized. In the s hort run, privatization is harmful because prices rise: the disciplina ry role of the public firm is lost. In the long run, privatization lea ds to further entry; the net effect is beneficial if consumer preferen ce for variety is not too weak. A sufficient statistic for the social surplus to be higher in the long run is that the public firm makes a l oss, This suggests that profitable firms should not necessarily be pri vatized.