, Volume 73, Issue 2, pp 205-239

Ownership versus competition: Efficiency in public enterprise

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Certainly the introduction of product market competition into potentially competitive or, at least contestable, markets can improve performance. To take just one example, Morrison and Whinston (1986, 1986) estimate that even in the imperfectly contestable U.S. airline industry, the annual U.S. welfare gains from deregulation have been around $6 billion.

But this paper argues, and further buttresses empirically, that ownership also matters and matters a lot. This does not necessarily imply that private ownership is always preferable to public ownership. PCs also engage in rent-seeking where possible, but they will try to maximize realizable rents by (relatively) keeping down production costs. Of course, where there are massive economies of scale and scope, high entry barriers, or externalities, public ownership may be preferred. (see Vickers and Yarrow, 1988).

A non-trivial (although as this article has demonstrated, not an obvious) conclusion is that where competition is normatively appropriate, private ownership is preferable from an efficiency perspective. Given that major product markets have continued to become more concentrated in most countries (see, for example, Hart and Clarke, 1980), the relative importance of contestable ownership in inducing technical (if not allocative) efficiency is likely to increase.

For a change the authors are listed in reverse alphabetical order. This research was supported by a grant from the Social Sciences and Humanities Council (Canada). We wish to thank Joan Caravan and Odette Vaughan for research assistance. We have benefitted from discussions with Simon Domberger, Steve Easton, Dennis Maki, Richard Murnane and Zane Spindler. Usual caveat.