Privatization and Quality Differentiation with Excess Burden of Taxation

Incorporating the excess burden of taxation into a mixed duopoly to evaluate privatization, we analyze Bertrand competition between the public and private firms producing goods of different qualities. We show that (i) when the only private (resp. public) firm offers high quality, privatization (resp. mixed duopoly) is desirable if the excess burden of taxation is sufficiently large, and vice versa. This implies that the governmentʼs role in implementing privatization goes in the opposite direction; (ii) if the excess burden of taxation is intermediate, privatization is preferable regardless of the public firmʼs quality.