Optimal privatization policy in the presence of network externalities

Chia Chi Wang, Jiunn Rong Chiou

Research output: Contribution to journalArticlepeer-review

4 Scopus citations


This article explores the optimal privatization policy for industries with network externalities in consumption, such as the telecommunications industry. The optimal degree of privatization depends crucially on the scale of network externality, the degree of compatibility (which, in the telecommunications industry, corresponds to the level of standardization that facilitates compatibility across different networks), and the cost type. A positive network externality will decrease the optimal degree of privatization, providing the rate of increase of marginal cost remains below a threshold. The impact of compatibility on optimal privatization is less straightforward. For instance, if the scale of network externality is low, a higher compatibility will increase optimal privatization if the rate of increase in marginal cost is also low. However, given a high network externality, optimal privatization initially increases, but then decreases as compatibility increases. Furthermore, optimal privatization with complete incompatibility may even be lower than that with complete compatibility.

Original languageEnglish
Pages (from-to)514-527
Number of pages14
JournalOxford Economic Papers
Issue number2
StatePublished - 1 Apr 2015


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