Equilibrium Solutions of Stackelberg Competition Strategy
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Abstract
Strategic interactions between public and private firms have important implications for competition policy and privatization decisions. This study examines equilibrium outcomes in Stackelberg duopoly and oligopoly markets, focusing on how a public firm’s strategic position shapes the welfare consequences of privatization. A game-theoretic equilibrium framework is used to compare market outcomes before and after privatization under alternative leadership and follower configurations, with Cournot competition also examined. The results indicate that privatization does not necessarily improve social welfare under Cournot competition when the number of private firms is relatively small. Under Stackelberg competition, privatization reduces social welfare when the initially public firm retains its leadership position after privatization, irrespective of the number of private competitors. When the firm instead retains its follower position, privatization also reduces social welfare in markets with relatively few private competitors. These findings demonstrate that the welfare consequences of privatization depend on both market concentration and firms’ strategic roles. The study contributes to the industrial organization literature by clarifying how market structure and leadership arrangements condition privatization outcomes. Its policy implications emphasize the need to consider the number of private competitors and the strategic position of the firm undergoing privatization when assessing potential welfare gains.
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