Privatization and Restructuring in Concentrated Markets

In stage 0, the government may restructure the state-assets k0 to kG and thereby improve the profitability of using the assets in the product market. [...] The privatization process is depicted as an auction5 where two 5 In order to focus on the market forces as the determinants of the equilibrium market struc- ture, we assume that the government sells the state assets to the highest bidder at an auction. [...] If the timing of the investment was instead, (1) the government, and (2) the acquirer and the non-acquirer investing simul- taneously, it can be shown that the incentive for the government to restructure relative to the acquirer would increase further. [...] In contrast, a delay in the privatization (henceforth, indicated D) causes a loss of the the first-mover advantage for the acquirer, which implies that the investment game takes place in simultaneous moves (stage two and three of the game taking place simultaneously). [...] Whether a government should opt for the potential rewards associated with restructuring, or simply sell while the state assets are in demand, is highly case-specific and will depend on the nature of the state assets, the degree of competition on the relevant market, the government’s ability to restructure etc.