Matteo Broso

I propose a model of quality-price competition between a public firm and a private one. Previous papers assume that public firms maximize welfare. I provide and micro-found a new objective function for the public firm using the median voter theorem. I argue that this objective function might be adopted when public firms have political ties. Under this new assumption, I study the impact of partial privatization on market structure, profits, and welfare.

As privatization increases, the market shifts from an inefficient public monopoly to a duopoly, where the public firm can even be more profitable than the private one. I also show that partial privatization is socially optimal.

We study the impact of market concentration on elections and lobbying in a political agency model with adverse selection and moral hazard. Two incumbent firms can lobby a politician (P) to prevent a pro-competitive reform. P's type determines whether they care about bribes or not. A representative voter tries to infer P's type monitoring the policymaking process. We investigate the welfare implications of a merger between the two firms. In equilibrium, the merger increases firms' incentives to lobby and their ability to influence politics. This additional political power reduces the chances that the pro-competitive reform is approved, hurting consumers; but it allows the voter to defeat a corruptible P with higher probability. Thus, it improves the voter's screening and mitigates adverse selection. We discuss how this new trade-off interacts with traditional competition considerations in the merger's assessment.