Endogenous Market Size, Partial Privatization, and Urban Structure

This study integrates a mixed duopoly market into an open monocentric city model and proposes a general equilibrium framework in which the market size is endogenously determined through urban structure and household location behavior. Public and private firms compete in the manufacturing sector, which is located in the central business district. The study analyzes how public firm privatization affects the equilibrium price of manufactured goods and the equilibrium city size. Privatization increases the equilibrium price and reduces the city size. However, once the indirect effects of city size are considered, the welfare impact of privatization becomes ambiguous. Consequently, Matsumura’s (1998) conclusion that partial privatization always maximizes social welfare does not hold true. Numerical examples illustrate that full nationalization or full privatization can be optimal depending on the parameter values. JEL Classification: H42; R13; L13