This paper develops a general equilibrium model a la Melitz (2003) and Melitz and Ottaviano (2008) to examine the short-run and long-run optimal privatization policies. By assuming that all firms are public firms initially, the paper focuses on how the degree of product differentiation and the average efficiency of the industry influence the determination of the optimal privatization policy. The paper shows that privatization decreases the more efficient firms’ outputs while increases the less efficient firms’ outputs in the short-run, and reduces all firms’ outputs in the long-run. The paper also shows that the bigger the degree of product differentiation and the smaller the number of firms are, the more privatized will be the public firm in the short-run. Moreover, as the degree of product differentiation (γ) or the entry barrier (fE) is sufficiently small, full privatization is the best policy in the long-run. On the contrary, as γ and fE are large enough, partial privatization is optimal.
