Pleasing Voters and Making Money: a Public Firm's Business
A partially privatized public firm competes with a private one in a game of endogenous product differentiation. The public firm maximizes the median voter's utility. I show that: (i) the public firm's profits may exceed those of its private competitor; (ii) the socially optimal degree of privatization is interior. I introduce regulation and externalities to study how the optimal privatization policy depends on the market structure.