Monopoly And State-ownership In A Market Economy,Theory And Empirical Evidence

Most industries in the economy cannot achieve perfect competition because of the existence of factors such as market frictions, entry cost, special product characteristics,and etc. Profit maximizing firms in a monopolistic industry will not take negative externalities and consumer surplus loss generated by such monopoly into consideration,and market is not fully efficient. Therefore appropriate government intervention in this case may increase social welfare. In a market economy, where the number of available tools for governmental intervention is limited, state-ownership, tax and subsidy are the main ones. However, budget constraint will impose further restrictions on government intervention.In this thesis, a benchmark model of single product is analyzed to discuss government's optimal intervention with balanced budget constraint in a monopolistic market. In such market, government can, for firms with marginally increasing cost function, achieve the social optimal by subsidizing firms with dividends received through equity holdings. In this case, the optimal choice for the government is neither full control nor privatization of the firms. However, in an oligopoly market where firms are allowed to enter freely but facing certain entry cost, government subsidy, while stimulate production, will lead to firms' over-entering. At the same time, tax will deter firm entrance but at the expense of depressing firms' production. As social optimality cannot be achieved through either policy mentioned above, the government must subsidizing firms' production while limiting their entry and balancing its budget constraint with income from equity holdings.The benchmark model is ten extended to a monopolistic competitive model for differentiated products. After conjectural variation being introduced, in equilibrium,without government intervention, firms may over-enter or under-enter depended entirely on the relative size of product differentiation effect to business-stealing effect.Governments can improve social welfare through holdings equity shares and subsidizing. The more competitions there are within an industry, the smaller state-ownership. Product differentiation is not the reason for cross-sectional difference in state-ownership in different industries.The theoretic results are tested empirically. In order to solve the endogeneityproblem, the market concentration of all industries in US are used as instrumental variable because it can be deemed as exogenous and can better reflect the monopolistic feature of each industry in a natural state without government intervention. The empirical results confirm that a causal relation exists between the monopolistic nature of an industry and state-ownership, that is, the more monopolistic an industry is, the higher proportion of government's equity holding. The results have important policy implications in guiding government's decision on state-ownership under a mixed ownership system in China.