Privatizing by merger: The case of an inefficient public leader

We compare a merger between an inefficient public leader and an efficient follower with unilateral privatization of the public leader (both eliminate the inefficiency of the leader). We identify the circumstances in which the merger increases both welfare and private profit and, for the first time, show that partial privatization by merger often dominates the unilateral privatization despite the loss of a competitor. Recognizing this helps define the extent of partial privatization by merger that should actually be observed and also suggests that more policy emphasis should be placed on privatization by merger. ► We examine the merger between a public firm and a follower. ► The public leader has a cost disadvantage and leadership. ► There is a range of partial privatization that is viable for both merging parties. ► Partial privatization through merger is often preferred to unilateral privatization.