Browsing by Author "Dutta, Priyanka"

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Consumer Welfare and Privatization in Mixed Markets: A Developing Country Perspective
(2026-07-14) Dutta, Priyanka
This thesis is presented in four chapters, each examining a distinct aspect of mixed market structures, with a consistent focus on consumer surplus as the primary metric for evaluating the desirability of privatization or private provision in the context of developing countries. The first chapter introduces a symmetric Cournot oligopoly model in which both public and private firms produce a homogeneous good and compete in quantities. We find that consumer surplus is maximized at the two extremes: when the market consists solely of public firms or solely of private firms. In contrast, mixed regimes consistently yield intermediate outcomes, never achieving either the highest or the lowest level of consumer surplus. This result is robust to the level of competition, the specific objective functions assigned to public firms, and holds across all log-concave demand functions and convex cost functions. Importantly, when cost functions are strictly convex, we show that, contrary to conventional wisdom, an increase in the number of firms does not necessarily support privatization; in fact, it may weaken the case for introducing private firms. The first chapter further extends the analysis to Bertrand competition with differentiated products, where firms compete in prices rather than quantities. Unlike in Cournot settings, firms' strategies are strategic complements under Bertrand competition. Despite this fundamental difference in the nature of competition, the key finding persists: mixed oligopolies never maximize consumer surplus. Moreover, in some cases, mixed markets can yield the lowest consumer surplus, even compared to fully public or private regimes. This counterintuitive outcome stems from the regime-contingent behavior of public firms. That is, an inefficient public firm with welfare concerns may respond to rival pricing by setting a higher price in a mixed regime than it would in a fully public one, thereby dampening consumer surplus. While the first chapter shows that mixed markets never yield the highest or lowest consumer surplus, this finding appears at odds with their widespread existence and institutional support across the globe. Several explanations may account for this disconnect. First, privatization decisions are often driven by objectives such as profitability or broader welfare considerations, rather than consumer surplus alone. Second, governments concerned with consumer surplus may still prefer a mixed regime in settings with weak competition policy, where full privatization could increase the risk of collusion. However, in the next two chapters, we demonstrate that mixed regimes can, in fact, top the consumer surplus ranking without resorting to alternative welfare metrics or relying on collusion-based explanations. What is required is to move beyond the symmetric, single-stage oligopoly framework used in the first chapter. The second chapter relaxes the assumption of symmetric firms by introducing cost heterogeneity, a key real-world feature, as firms often differ in cost structures for reasons unrelated to ownership. While privatization can improve efficiency, it may not fully eliminate these underlying cost differences. In this setting, we show that mixed regimes can deliver the highest consumer surplus. For instance, in a duopoly, privatizing the inefficient firm while retaining public ownership of the efficient one can outperform both fully public and fully private regimes. Conversely, if privatization targets the more efficient firm, leaving the less efficient one public, consumer surplus can be the lowest among all ownership structures. These results suggest that ownership design should account for firm-specific efficiency differences, and that optimal privatization policy may be highly context-dependent. The third chapter addresses another limitation of earlier models by considering a vertically related market, with upstream and downstream monopolists interacting in a two stage production process. Public firms in both sectors introduce two layers of inefficiency, while private firms in both sectors generate two rounds of markups, a classic double marginalization problem. We show that a mixed regime can yield the highest consumer surplus by eliminating one layer of inefficiency and one round of markup. This outcome is most likely when markups are moderate and inefficiencies are unevenly distributed across the two sectors. If the inefficiency of public firms is symmetric across the upstream and downstream sectors, mixed regimes tend to perform intermediately or even poorly in terms of consumer surplus. However, when public firm inefficiencies differ sufficiently across sectors, and markup levels are not too high, a mixed structure can outperform both extremes. Extending the model to a richer setting with both upstream and downstream oligopoly shows that the desirability of mixed regimes persists and, in fact, becomes stronger as competition intensifies. Thus, the interaction between vertical structure, firm efficiency, and market power plays a critical role in shaping welfare outcomes in privatization decisions. While the first three chapters evaluate privatization using consumer surplus as a welfare metric under standard oligopoly assumptions, the fourth chapter introduces a new dimension: congestion. In many markets such as healthcare, education, telecommunications, transportation etc., congestion disutility arises as firms serve more consumers, reducing individual utility. We model a Cournot oligopoly with congestion under both mixed and fully private regimes and characterize equilibrium outcomes in the presence of congestion. We conduct comparative static analysis with respect to market size and competition and determine a consumer surplus threshold: a fully private regime yields a higher consumer surplus if the relative cost inefficiency of the public firm exceeds this threshold. We show that congestion and increases in market size both lower this threshold, making privatization more favorable. However, the effect of competition is more nuanced. An increase in competition facilitates privatization only when the initial level of competition is low. Beyond a certain point, additional competition could in fact facilitate public provision. These results highlight how market structures and conditions influence optimal ownership structure in the presence of congestion. Collectively, the four chapters of this thesis underscore the importance of evaluating privatization and ownership design through the lens of consumer welfare, particularly in the context of developing economies. The results challenge simplistic assumptions about public versus private provisions and offer a nuanced framework for understanding when mixed markets can be not just a compromise, but an optimal institutional structure.