Privatization and innovation in a vertical structure

Wu, Xiaoting; Mukherjee, Arijit; Zeng, Chenhang

Abstract

We investigate how upstream privatization affects downstream R&D investments and social welfare in a vertically-related industry with an upstream monopolistic firm and two downstream firms. One of the downstream firms can undertake R&D investments to reduce input coefficient. We examine two cases: private upstream monopoly versus public upstream monopoly, and show that the presence of a public upstream firm might reduce the downstream firm's motivation to invest in R&D. Compared to upstream nationalization, upstream privatization could lead to higher consumer surplus and social welfare, especially when the R&D process is significantly efficient. We further extend our analysis in three directions to show the implications of technology spillovers, upstream competition and downstream R&D competition. We show that our main results hold with the presence of technology spillovers, and under a successive Cournot oligopoly involving two upstream firms. When there is downstream R&D competition, upstream privatization always hurts consumers and social welfare. Our study yields valuable insights for privatization policies.

Citation

Wu, X., Mukherjee, A., & Zeng, C. (2024). Privatization and innovation in a vertical structure. China Economic Review, 84, Article 102139. https://doi.org/10.1016/j.chieco.2024.102139

• Journal Article Type: Article
• Acceptance Date: Feb 20, 2024
• Online Publication Date: Feb 29, 2024
• Publication Date: 2024-04
• Deposit Date: Mar 5, 2024
• Publicly Available Date: Aug 30, 2025
• Journal: China Economic Review
• Print ISSN: 1043-951X
• Electronic ISSN: 1043-951X
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 84
• Article Number: 102139
• DOI: https://doi.org/10.1016/j.chieco.2024.102139
• Keywords: Vertical industry; Upstream privatization; Downstream R&D; Welfare
• Public URL: https://nottingham-repository.worktribe.com/output/32167958